CCentral & Eastern European Strategyentral & Eastern European … · 2018. 5. 2. · Promsvyazbank...

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Central & Eastern European StrategyCentral & Eastern European Strategy2nd quarter 2013

Economy will bottom out in H1

Fiscal consolidation is proceeding

Corporate Eurobonds: strong issuance from Russia

High liquidity available for equity investments

Equal stock and bond weightings

2 2nd quarter 2013

Content

Topical issue: CEE under the sway of weak net exports and fiscal consolidation 3

Forecasts CEE incl. Austria 4

Asset allocation CEE incl. Austria 6

Focus on: Fiscal consolidation is the right answer 10

Austria 12

CE: Poland 14

Hungary 16

Czech Republic 18

Slovakia 20

Slovenia 21

SEE: Croatia 22

Romania 24

Bulgaria 26

Serbia 27

Bosnia and Herzegovina 28

Albania 29

Kosovo 30

CIS: Belarus 31

Russia 32

Ukraine 34

Turkey 36

Sovereign Eurobonds 38

Corporate Eurobonds 40

Equity markets 42

Sectors 48

Equities - top picks 54

Equities - region overview 59

Sector weightings in comparison 63

Technical analysis 64

Quantitative analysis 66

Acknowledgements 67

Central & Eastern European Strategy

Explanation:e ... estimatef ... forecastp ... preliminary figures n.v. ... no value

AbbreviationsCurrencies and CountriesALL Albanian lekBAM Bosnian markaBGN Bulgarian levBYR Belarusian roubelCZK Czech korunaEKK Estonian kroonHUF Hungarian forintHRK Croatian kunaLTL Lithuanian litasLVL Latvian latsPLN Polish zlotyRON Romanian leuRSD Serbian dinarRUB Russian roubleSIT Slovenian tolarSKK Slovak korunaTRY Turkish liraUAH Ukrainian hryvnia

Economic abbreviations %-chg Percentage change (not in percentage points)avg averagebp basis pointsC/A Current AccountCPI Consumer Price IndexFCY Foreign CurrencyFDI Foreign Direct InvestmentsFX Foreign ExchangeFY Full yearGDP Gross Domestic ProductLCY Local Currencymmav month moving averagemom month on monthO/N overnight rate pp percentage pointsPPI Producer Price Indexqoq quarter on quarterT/B Trade BalanceULC Unit Labour Costsyoy year on yearytd year-to-date

Stock Exchange IndicesBELEX15 Serbian stock indexBET Romanian stock indexBUX Hungarian stock indexCROBEX10 Croatian stock indexPX Czech stock indexMICEX Russian stock indexSASX-10 Bosnian stock indexWIG 20 Polish stock index

Equity relatedDY Dividend yieldEG Earnings growthLTG Long term (earnings) growthP/B Price book ratioP/E Price earnings ratio

RS Recommendation suspendedUR Under Revision

Eurozone Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Slovakia, Spain

CE Central European countries - Poland, Hungary, Czech Republic, Slovakia, Slovenia

SEE South East European countries - Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Serbia

CIS European CIS (Commonwealth of Independent States) countries - Russia, Ukraine, Belarus

CEE Central and Eastern Europe (CE + SEE + CIS)

32nd quarter 2013

Topical issue

During recent months, little has changed in terms of the fundamental economic situ-ation. While most of the countries in Central Europe (CE) and Southeastern Europe (SEE) are now suffering from the contraction in production as anticipated, the CIS countries are still posting positive growth rates. Nevertheless, growth in these coun-tries has also slowed to levels well below the long-term potential rates.As in the previous quarter, the recession in large parts of the Eurozone is dragging net exports deep into negative territory. Since Q4 2012, GDP growth rates in CEE have also slipped into the red, aside from a few exceptions, as the widespread budget consolidation efforts and the modest increases in real income have ham-pered domestic demand for quite some time. The available indicators suggest that economic performance will bottom out in the first half of 2013. Consequently, a more significant pick-up in growth throughout Eastern Europe will probably only start during the second half of the year. Growth in Russia and Ukraine was also much less dynamic early this year, compared to 12 months ago. In Austria, a mild improvement in growth will also probably only emerge after the spring quarter. Fiscal consolidation in Central and Southeastern Europe is proceeding at different speeds. Generally speaking, however, it is true that appetite for CEE government bonds – both for LCY paper and Eurobonds – has increased substantially, due to the extremely low yields in the Eurozone. This will also help ease the financing require-ments of these countries as 2013 progresses.The declines in inflation seen throughout the region early in the year should continue until the third quarter. This, in turn, will support some improvement in real incomes in the second half of 2013. For Austria, we also estimate that consumer price inflation will drop below 2 % rom the second quarter, leading to headline inflation of 1.9 % for the year as a whole, which is considerably lower than last year’s rate (2.6%).Impact on monetary policy and exchange ratesThe economic slowdown and the favourable course of inflation have significantly boosted the scope for easing monetary policy. For instance, interest rates in Poland have been lowered more than expected, and the new governor of the central bank in Hungary will also push forward with rate cuts. A modest downward trend in inte-rest rates is even taking shape in Russia. The more pronounced declines in interest rates are partly reflected in somewhat weaker exchange rates. Political tensions in Hungary have also resulted in weakening of the HUF exchange rate to levels over 300 versus the euro. Impact on the bond and equity marketsStrong foreign demand for CEE government bonds has helped to lower yield levels. We believe that most of the more expansive monetary policy has been discounted in prices. Consequently, we project that yields on government bonds throughout the region will remain broadly unchanged until mid-year. By contrast, we see more po-tential for the CEE equity markets, where we expect to see indices to rise by between 4% and 9% by the end of Q2. In terms of performance Istanbul should take the lead, followed by Bucharest and Vienna.

Peter Brezinschek

CEE under the sway of weak net exports and fiscal consolidation

Recommendations1 – debt markets

Corporate bonds

Sell Halyk Bank 7.25% due 2017

Buy Evraz 6.75% due 2018 Promsvyazbank 6.2% due 2014

1 horizon: end 2nd quarter 20132 the indicated price is the last price as available at 6.30 a.m. (CET) on 21 March 2013Source: Raiffeisen RESEARCH

Recommendations1 - stock markets

Indices

Buy ATX, WIG 20, BUX, PX, BET, CROBEX10, ISE National 100

Sectors

Overweight Industrials, Energy, MaterialsUnderweight Telecommunications, UtilitiesEquities

Buy

CA ImmobilienEUR 10.9312

Target price: EUR 12.70

MOLHUF 16,61512

Target price: HUF 20,500

Azoty TarnowPLN 55.2012

Target price: PLN 67.00

PKO BPPLN 34.2012

Target price: PLN 39.80

LUKoilRUB 1,94012

Target price: RUB 2,555

GDP development (% yoy)

Source: Bloomberg, Raiffeisen RESEARCH

-1

1

3

5

2011 2012 2013e 2014fEurozone CESEE CISCEE

Recent declines in GDP will only gradually be replaced by growth during H2 2013 in CEE Greater-than-expected leeway for interest rate cuts keeps a lid on exchange rates Equity market performance will remain heterogeneous in the spring

4 2nd quarter 2013

Consumer prices (avg, % yoy)

Countries 2011 2012 2013e 2014fPoland 4.3 3.7 1.6 2.2Hungary 3.9 5.7 2.8 3.4Czech Rep. 1.9 3.3 1.9 2.0Slovakia 3.9 3.6 2.2 2.5Slovenia 1.8 2.6 2.5 2.3CE 3.6 3.8 1.9 2.4Croatia 2.3 3.4 3.2 3.0Bulgaria 4.2 3.0 3.1 3.4Romania 5.8 3.3 4.9 3.5Serbia 11.3 7.8 13.0 9.0Bosnia a. H. 3.7 2.1 2.0 2.1Albania 3.5 2.0 2.5 3.0SEE 5.4 3.7 5.1 4.0Russia 8.5 5.1 6.2 5.8Ukraine 8.0 0.6 1.8 7.5Belarus 53.2 59.2 20.0 17.5CIS 9.7 6.3 6.2 6.3CEE 7.5 5.3 4.9 4.9Turkey 6.5 9.0 6.0 6.0Austria 3.6 2.6 1.9 2.0Germany 2.5 2.1 1.5 1.5Eurozone 2.7 2.5 1.7 1.8USA 3.2 2.1 1.5 2.0Source: Thomson Reuters, Raiffeisen RESEARCH

Current account balance (% of GDP)

Countries 2011 2012 2013e 2014fPoland -4.9 -3.5 -3.0 -3.9Hungary 0.9 1.4 1.8 1.5Czech Rep. -2.8 -2.4 -2.1 -2.0Slovakia -2.0 2.2 2.9 2.9Slovenia 0.0 2.4 2.7 1.3CE -3.1 -1.8 -1.4 -2.0Croatia -0.9 -0.3 -0.3 -0.5Bulgaria 0.3 -0.7 -1.6 -2.3Romania -4.5 -3.8 -3.4 -3.4Serbia -9.3 -10.7 -9.6 -9.6Bosnia a. H. -9.5 -9.7 -9.8 -9.9Albania -11.3 -8.8 -9.1 -9.2SEE -4.3 -4.0 -3.9 -4.1Russia 5.2 4.1 2.7 1.9Ukraine -6.2 -8.3 -6.8 -6.4Belarus -8.6 -2.9 -5.6 -7.3CIS 3.9 2.9 1.8 1.0CEE 1.0 1.0 0.4 -0.2Turkey -10.0 -6.1 -6.7 -6.3Austria 0.6 1.5 1.0 0.9Germany 5.7 5.8 5.5 5.5Eurozone 0.1 1.2 1.4 1.4USA -3.1 -3.0 -2.8 -2.5Source: Thomson Reuters, Raiffeisen RESEARCH

Forecasts

General budget balance (% of GDP)

Countries 2011 2012 2013e 2014fPoland -5.0 -3.5 -3.4 -2.8Hungary 4.3 -2.4 -3.0 -3.4Czech Rep. -3.1 -4.9 -3.0 -2.6Slovakia -4.9 -4.7 -2.9 -2.4Slovenia -6.4 -4.0 -3.5 -3.2CE -3.4 -3.8 -3.2 -2.8Croatia -5.0 -4.1 -4.2 -3.8Bulgaria -2.1 -0.5 -2.1 -1.7Romania -5.7 -3.0 -2.8 -2.5Serbia -4.5 -6.6 -4.5 -4.0Bosnia a. H. -1.3 -2.0 -1.5 -1.0Albania -3.5 -3.0 -3.0 -3.0SEE -4.7 -3.1 -3.1 -2.7Russia 1.6 0.4 0.4 -1.0Ukraine -4.3 -5.5 -4.0 -3.0Belarus 2.4 0.5 -1.0 0.0CIS 1.2 0.0 0.0 -1.1CEE -0.8 -1.4 -1.3 -1.8Turkey -1.4 -2.4 -2.2 -2.5Austria -2.5 -3.1 -2.6 -1.8Germany -0.8 0.1 -0.5 0.0Eurozone -4.1 -3.5 -2.8 -2.7USA -8.7 -7.0 -5.3 -3.7Source: Thomson Reuters, Raiffeisen RESEARCH

Public debt (% of GDP)

Countries 2011 2012 2013e 2014fPoland 56.4 56.1 56.1 53.8Hungary 80.6 78.3 78.9 78.7Czech Rep. 40.8 45.8 47.9 48.9Slovakia 43.3 52.2 54.9 55.8Slovenia 46.9 54.0 65.0 67.0CE 54.7 56.3 57.5 56.7Croatia 46.7 54.0 58.1 60.6Bulgaria 16.3 18.3 17.8 19.4Romania 34.7 37.4 38.2 38.3Serbia 45.8 59.7 61.2 59.9Bosnia a. H. 39.2 42.0 42.1 39.6Albania 59.4 61.5 62.6 62.0SEE 36.5 41.1 42.4 42.8Russia 9.8 10.5 11.0 11.5Ukraine 36.0 36.8 38.0 38.5Belarus 48.5 31.5 31.0 30.3CIS 12.9 13.1 13.7 14.1CEE 27.5 28.6 29.4 29.5Turkey 39.1 36.8 35.0 33.0Austria 72.4 74.5 75.6 75.2Germany 80.5 81.7 81.0 78.7Eurozone 87.3 93.1 95.1 95.2USA 98.7 103.1 106.3 107.3Source: Thomson Reuters, Raiffeisen RESEARCH

Gross foreign debt (% of GDP)

Countries 2011 2012 2013e 2014fPoland 67.2 71.3 70.9 69.6Hungary 130.2 130.0 123.2 112.5Czech Rep. 48.8 49.6 50.2 49.9Slovakia 76.3 71.2 69.9 74.7Slovenia 111.0 111.3 111.1 110.5CE 75.0 76.5 75.3 73.5Croatia 101.7 100.5 98.9 96.5Bulgaria 93.1 96.4 93.3 92.9Romania 75.2 75.3 71.3 68.7Serbia 77.6 86.9 80.4 74.3Bosnia a. H. 67.1 63.1 62.2 61.0Albania 23.6 24.5 24.3 26.4SEE 80.2 81.3 77.8 75.3Russia 30.8 30.3 30.4 31.3Ukraine 76.7 76.8 79.4 80.4Belarus 61.1 52.6 47.5 48.7CIS 35.6 34.4 34.5 35.4CEE 51.8 50.3 49.5 49.3Turkey 42.6 44.3 45.3 46.4Austria n.v. n.v. n.v. n.v.Germany n.v. n.v. n.v. n.v.Eurozone n.v. n.v. n.v. n.v.USA n.v. n.v. n.v. n.v.Source: Thomson Reuters, Raiffeisen RESEARCH

Exchange rate EUR/LCY (avg)

Countries 2011 2012 2013e 2014fPoland 4.12 4.19 4.09 4.00Hungary 279.3 291.9 293.8 290.0Czech Rep. 24.6 25.1 25.3 24.5Slovakia euro euro euro euroSlovenia euro euro euro euro

Croatia 7.43 7.52 7.55 7.50Bulgaria 1.96 1.96 1.96 1.96Romania 4.24 4.46 4.44 4.45Serbia 102.0 113.0 113.9 114.8Bosnia a. H. 1.96 1.96 1.96 1.96Albania 140.3 139.0 138.5 138.3

Russia 40.9 40.0 41.3 41.7Ukraine 11.11 10.39 11.39 12.24Belarus 6,900 10,700 12,300 13,700

Turkey 2.34 2.31 2.39 2.34Austria euro euro euro euroGermany euro euro euro euroEurozone euro euro euro euroUSA 1.39 1.29 1.34 1.33Source: Thomson Reuters, Raiffeisen RESEARCH

Ratings1

Countries S&P Moody's FitchPoland A- A2 A-Hungary BB Ba1 BB+Czech Rep. AA- A1 A+Slovakia A A2 A+Slovenia A- Baa2 A-

Croatia BB+ Ba1 BBB-Bulgaria BBB Baa2 BBB-Romania BB+ Baa3 BBB-Serbia BB- not rated BB-Bosnia a. H. B B3 not ratedAlbania B+ B1 not rated

Russia BBB Baa1 BBBUkraine B B3 BBelarus B- B3 not rated

Turkey BB Ba1 BBB-Austria AA+ Aaa AAAGermany AAA Aaa AAA

USA AA+ Aaa AAA1 for FCY, long-term debtSource: Bloomberg, Raiffeisen RESEARCH

Real GDP (% yoy)

Countries 2011 2012 2013e Consensus 2014f ConsensusPoland 4.3 2.0 1.2 1.5 2.5 2.8Hungary 1.6 -1.7 -0.5 0.1 1.5 1.3Czech Rep. 1.7 -1.2 -0.2 0.0 1.8 1.7Slovakia 3.2 2.0 0.9 1.1 2.5 2.4Slovenia 0.6 -2.3 -1.0 -1.2 1.0 0.6CE 3.1 0.6 0.5 0.8 2.1 2.2Croatia 0.0 -2.0 -0.5 -0.1 1.0 1.5Bulgaria 1.8 0.8 0.5 1.3 2.5 2.2Romania 2.2 0.3 1.5 1.5 3.0 2.7Serbia 1.6 -1.9 1.0 1.4 2.0 2.9Bosnia a. H. 1.0 -1.3 0.5 0.8 2.0 2.5Albania 3.1 2.0 2.0 2.2 3.5 3.3SEE 1.7 -0.3 0.9 1.2 2.4 2.5Russia 4.3 3.4 3.0 3.3 3.0 3.8Ukraine 5.2 0.2 1.0 1.5 3.0 3.2Belarus 5.3 1.5 3.0 2.8 4.0 3.5CIS 4.4 3.1 2.8 3.1 3.0 3.7CEE 3.7 2.0 2.0 2.1 2.7 3.0Turkey 8.5 3.0 4.0 3.9 4.5 4.8Austria 2.7 0.8 0.5 0.7 1.5 1.5Germany 3.1 0.9 0.5 0.7 1.8 1.7Eurozone 1.5 -0.5 -0.1 -0.3 1.5 1.0USA 1.8 2.2 1.5 1.8 2.5 2.8Source: wiiw, Raiffeisen RESEARCH

52nd quarter 2013

Exchange rate forecast

Countries 21-Mar1 Jun-13 Sep-13 Mar-14vs EURPoland 4.19 4.17 4.10 4.00Hungary 306.69 305.0 290.0 290.0Czech R. 25.79 25.4 25.2 24.8Croatia 7.60 7.50 7.55 7.57Romania 4.42 4.45 4.50 4.45Serbia 111.73 113.0 113.0 113.0Albania 140.01 139.0 138.5 138.8

vs USDRussia 30.9 30.3 30.9 30.8Ukraine 8.14 8.30 8.70 9.20Belarus 8,640 8,800 9,300 10,000Turkey 1.82 1.75 1.80 1.75

EUR/USD 1.29 1.35 1.33 1.351 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

2y LCY yield forecast

Countries 21-Mar1 Jun-13 Sep-13 Mar-14Poland 3.13 3.17 3.08 3.41Hungary 4.81 4.85 4.80 5.25Czech R. 0.04 0.10 0.20 0.30Croatia 3.14 3.60 3.90 4.00Romania 5.11 4.92 5.12 4.95Russia 6.03 6.00 5.80 5.80Turkey 6.02 6.00 6.10 5.90

Austria 0.09 0.15 0.25 0.65Germany 0.02 0.10 0.20 0.60USA 0.25 0.30 0.30 0.40

1 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Key interest rate forecast

Countries 21-Mar1 Jun-13 Sep-13 Mar-14Poland 3.25 3.25 3.25 3.25Hungary 5.25 4.25 4.25 4.25Czech R. 0.05 0.05 0.05 0.05Romania 5.25 5.25 5.25 5.00Russia 8.25 7.75 7.75 7.75Turkey 5.50 5.25 5.25 5.25

Eurozone 0.75 0.75 0.75 0.75USA 0.25 0.25 0.25 0.251 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Forecasts

3m money market rate forecast


Eurozone 0.21 0.25 0.30 0.50USA 0.28 0.25 0.25 0.301 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH









Yield structure

Bp-spread between 10y and 3m maturitySource: Bloomberg, Raiffeisen RESEARCH

020406080

100120140160180

Pola

nd

Hun

gary

Cze

chRe

p.

Rom

ania

Ger

man

y

USA

LCY changes vs. EUR (% qoq)1

1 21-Mar 2013 in comparison to 31-Dec 2012Source: Bloomberg

USD

RUB

RON

TRY

PLN

CZK

HUF

-6 -4 -2 0 2 4

Expected yield change

Bp-change of gov. bond yield in next 3 monthsSource: Bloomberg, Raiffeisen RESEARCH

-40-30-20-10

010203040

Pola

nd

Hun

gary

Cze

ch R

ep.

Rom

ania

Ger

man

y

USA

Expected index performance

Source: Raiffeisen RESEARCH

0%

2%

4%

6%

8%

10%

ATX

WIG

20

BUX PX

MIC

EX BET

CRO

BEX1

0

ISE

Nat

. 100

Jun-13 Sep-13

Stock market indicators

Earnings growth

Price/ear-nings ratio

13e 14f 13e 14f

ATX 29.8% 11.9% 11.0 9.8WIG 20 -15.6% 5.4% 12.0 11.4BUX 8.7% 11.1% 8.8 7.9PX1 10.4% 5.9% 11.1 10.5MICEX 5.0% 3.6% 5.3 5.2BET 31.4% 10.0% 6.1 5.6CROBEX10 5.6% 5.5% 9.1 8.6ISE Nat.100 10.2% 8.7% 11.5 10.61 Czech Rep. (PX): excl. Orco PropertySource: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

Stock market forecasts

Index estimates

21-Mar1 Jun-13 Sep-13 Mar-14

ATX 2,452 2,560 2,500 2,630WIG 20 2,396 2,500 2,450 2,650BUX 18,250 19,000 18,800 19,900PX 983 1,020 1,000 1,080MICEX 1,459 1,500 1,480 1,620BET 5,687 6,000 5,900 6,200CROBEX10 1,108 1,150 1,140 1,200ISE Nat. 100 82,374 90,000 87,000 95,0001 11:59 p.m. (CET)In local currencySource: Bloomberg, Raiffeisen RESEARCH

6 2nd quarter 2013

Asset allocation - performance

Sum of last quarter1

RBI portfolio (in EUR) -2.18%Benchmark (in EUR) -2.11%RBI outperformance (in EUR) -0.07%by weighting of equities vs. bonds 0.06%

regional equity weightings -0.14%weighting of EB vs. LCY bonds -0.01%country weightings of LCY bonds 0.04%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration -0.02%

1 31.12.2012 - 21.3.2013EB...EurobondsSource: Thomson Reuters, Raiffeisen RESEARCH

Due to the very challenging market conditions the CEE portfolio ended up with mild underperformance of 7 basis points (bp). The more offensive overweighting of equities versus bonds by 5 percentage points in the first period resulted in outperformance of 15bp, and much of these gains were taken following a some-what more defensive weighting in the ensuing period. In the most recent period, this weighting was shifted to neutral.

In the equities segment, Poland and Russia were overweighted in the first period based on their economic strengths, with these positions financed from Hungary and Croatia. Comparatively speaking, the bet on Russia developed the best, and the gains were taken in the next period as this weighting was maintained. Along with Hungary, the better-than-average performance in Croatia during the first period came earlier than expected, and in reaction to this an overweight posi-tion was successfully adopted in the following periods (+3bp). The financing from Czech equities during this period was also broadly advantageous.

In the bonds segment, all in all a significant outperformance of around 5bp was achieved on the individual positions. During the first period, USD- and EUR-denominated Eurobonds were underweighted versus LCY bonds, leading to a neutral result. During the first period, the overweight on Russia and Turkey was fi-nanced with an underweight on the Czech Republic and Hungary, which resulted in outperformance of more than 3bp, mainly due to the positive performance in Russia which was expected. During the following periods, the positions on Rus-sia and Turkey remained overweight, this time financed exclusively from lower yielding Czech bonds. This ultimately resulted in outperformance of over 1bp.

Stefan Theußl

CEE markets prove their potential to catch up

Period 1: 31-Dec 2012 – 30-Jan 2013

RBI portfolio (in EUR) -0.77%Benchmark (in EUR) -0.75%RBI outperformance (in EUR) -0.02%by weighting of equities vs. bonds 0.15%

regional equity weightings -0.17%weighting of EB vs. LCY bonds -0.01%country weightings of LCY bonds 0.02%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration -0.02%

EB...Eurobonds Source: Thomson Reuters, Raiffeisen RESEARCH

Period 2: 30-Jan – 26-Feb 2013

RBI portfolio (in EUR) -0.58%Benchmark (in EUR) -0.51%RBI outperformance (in EUR) -0.07%by weighting of equities vs. bonds -0.09%

regional equity weightings 0.01%weighting of EB vs. LCY bonds -0.01%country weightings of LCY bonds 0.01%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%


Period 3: 26-Feb – 21-Mar 2013

RBI portfolio (in EUR) -0.85%Benchmark (in EUR) -0.87%RBI outperformance (in EUR) 0.02%by weighting of equities vs. bonds 0.00%

regional equity weightings 0.02%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.00%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%


-0.2

0.0

0.2

96

98

100

102

104

Jan-13 Feb-13 Mar-13

in p

erce

ntag

e po

ints

RBI-Portfolio Outperformance (r.h.s.)

Performance 2013

Source: Thomson Reuters, Raiffeisen RESEARCH

Outperformance thanks to offensive overweighting of equities versus bonds Croatian equity market closes the gap Successful overweighting of Russian bonds in all periods

72nd quarter 2013

Asset allocation - total portfolio

Since the beginning of the year, very few of the CEE markets have been able to keep up with the performance seen on the established markets. For the CEE port-folio, we expect the risk-return profile for equities to be complicated over the me-dium term. Amongst other things, the reason for this is the differentiated situation for the two largest positions in our portfolio. On the one hand, there is Poland, which has robust, albeit weakening economic growth prospects and a financial market which is attractive for investors. On the other hand, there is Russia, where valuations are still looking very cheap in historical terms, but which is strongly driven by developments in commodities. In terms of currencies and yields, we do not expect any major moves throughout the CEE region in Q2. Yields on 10Y Czech government bonds should rise slightly, whereas a mild downward trend should be seen in Russia.

Assuming there is a modest economic recovery, we see the yield potential for equities at around 4% for this region on the whole. For bonds, we expect a de-velopment of around 2%. In view of the relatively elevated uncertainty in the CEE markets, we would expect a higher premium on risky assets and consequently we weight these asset classes neutral versus each other. Within the bond portfolio, the current conditions do not leave much leeway for overweighting LCY bonds versus Eurobonds. The first group is profiting from strong capital inflows and for the second group there is a trend towards tighter spreads. Consequently, we also shift both these positions to neutral.

Stefan Theußl

CEE stock markets still in a waiting position

Historical volatility & performance (in %)

Equities1 BondsVolatility Performance Volatility Performance

Countries EUR LCY EUR LCY EUR LCY EUR LCY

Czech Republic 17.4 15.3 -12.7 -10.5 5.5 2.7 -2.5 0.1

Hungary 22.7 18.6 -1.8 2.9 9.7 2.8 -2.8 1.9

Poland 14.3 11.3 -8.7 -6.3 6.6 3.2 -2.7 -0.2

Romania 16.6 15.5 11.9 11.3 4.7 0.7 1.6 1.1

Russia 13.0 11.9 0.4 -0.7 6.1 2.3 2.2 1.3

Turkey 22.9 20.7 5.2 4.8 7.6 2.7 0.8 0.5

Croatia 10.2 9.6 9.2 9.9 2.4 2.4 1.0 1.0

CEE 11.1 - -2.1 - 4.2 - -2.0 -1 MSCI indicesVolatility in EUR; 3 months volatility annualised; ytd performance in EURLCY…local currencySource: Thomson Reuters, Raiffeisen RESEARCH

CEE portfolio weightings Q1 2013

LCY…local currency[-] , [+] = Over-/underweight versus benchmarkSource: Raiffeisen RESEARCH

Risk-return (in %)

In local currencySource: Thomson Reuters, Raiffeisen RESEARCH

CEE hardly able to profit from the rebound in the established markets so far Prospects for modest increases in core countries Neutral weighting of equities versus bonds

Equities: 50% [0 pp]

LCY-bonds: 40%

[0 pp]

EB USD: 5% [0 pp]

EB EUR: 5% [0 pp]

RTS-Index

WIG 20CTX

HTX

DJ Euro-stoxx

CEE

BET 10

-16-12

-8-4048

121620

15 20 25 30

His

toric

ytd

per

form

ance

in %

Historic 1y volatility in %

8 2nd quarter 2013

Asset allocation - bonds

Demand remains robust for LCY bonds

Expected bond market performance (in %)

3m 6m 9m 12m


Czech Republic 0.9 -0.7 2.7 0.3 1.1 -2.8 3.1 -0.8

Hungary 3.5 3.0 11.4 5.3 14.0 7.8 15.5 9.2

Poland 2.3 1.7 4.7 2.4 6.8 2.5 6.9 2.0

Romania 4.6 5.3 4.1 6.0 7.3 8.0 9.8 10.5

Russia -1.7 0.8 2.2 5.3 3.6 9.0 6.7 10.9

Turkey 7.8 5.3 4.9 7.1 4.9 8.7 12.8 13.6

Croatia 2.6 1.3 2.9 2.3 2.5 2.6 4.4 4.0 Not annualised; 10y treasury bond, LCY…local currencySource: Raiffeisen RESEARCH

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Cze

ch R

ep.

Hun

gary

Pola

nd

Rom

ania

Russ

ia

Turk

ey

Cro

atia

EUR LCY

Historical relative performance*

*in percentage points, year to date, local currency bonds versus portfolio bond benchmarkSource: Thomson Reuters, Raiffeisen RESEARCH

Sustained inflows of capital into Eastern European LCY bonds More rate cuts ahead amidst slack economic conditions Currencies mostly expected to move sideways

Portfolio weightings: bonds*

Portfolio Benchmark Difference

EB USD 10.0% 10.0% 0.0%

EB EUR 10.0% 10.0% 0.0%

LCY 80.0% 80.0% 0.0%

Czech Republic 17.0% 20.0% -3.0%

Hungary 20.0% 20.0% 0.0%

Poland 45.0% 45.0% 0.0%

Romania 5.0% 5.0% 0.0%

Russia 6.5% 5.0% 1.5%

Turkey 6.5% 5.0% 1.5%

Croatia 0.0% 0.0% 0.0%* share in percentage pointsSource: Raiffeisen RESEARCH

In the quarter ahead we expect to see quite uniform devel-opment on the LCY bond markets in the CEE portfolio. No major shifts are anticipated in exchange rates or yields. The only country where there is significantly elevated event risk is Hungary. Nevertheless, the currency has already shown a strong negative reaction, and consequently we do not expect to see any large-scale moves in the forint this quarter. Against the background of this sideways trend, we make two carry bets in the bond portfolio. We overweight high-yielding Turkish government bonds and Russian government bonds by 1.5% each and finance this with an underweight on Czech government bonds, which have the lowest yields in the portfolio.

As we expect both the Russian and Turkish central banks to lower interest rates, additional price gains may improve the results, along with the interest rate benefits. Inves-tors’ intense investment needs and the hunt for somewhat higher yields may lead to further inflows of capital into the high-yielding bond markets and result in some overshoot-ing, although this is not reflected in our forecasts due to the fact that the Eastern European bond markets have already reached quite high valuation levels. Another negative fac-tor may be a sharp appreciation of the euro, as both the Russian rouble and Turkish lira are partially oriented to USD.

Veronika Lammer

92nd quarter 2013

Asset allocation - equities

Positive conditions on the equity markets, but no rally

Eastern European equity markets moving in line with the established markets Romania and Poland as modest outperformers Russia and Czech Republic offer less potential

Expected stock market performance (in %)

3m 6m 9m 12m


Poland 5.5 4.3 5.1 2.3 13.8 8.5 17.4 10.6

Hungary 4.7 4.1 8.9 3.0 13.6 7.4 15.3 9.0

Czech Republic 5.4 3.8 4.1 1.7 13.2 8.9 14.3 9.9

Russia 0.2 2.8 -1.6 1.4 2.9 8.3 6.8 11.0

Romania 4.8 5.5 1.9 3.7 6.6 7.3 8.3 9.0

Croatia 5.1 3.8 3.5 2.9 5.6 5.6 8.7 8.3Not annualised, LCY…local currencySource: Raiffeisen RESEARCH

-15%

-10%

-5%

0%

5%

10%

15%

20%

Rom

ania

Cro

atia

Russ

ia

Hun

gary

Pola

nd

Cze

ch R

epub

lic

EUR Local currency

Historical relative performance*

*in percentage points, year to date, to MSCI CEE, since 18 December 2012Source: Thomson Reuters, Raiffeisen RESEARCH

Following divergent performance in the first quarter, we mainly expect to see more strong price gains in Turkey during the second quarter. This market, however, is not represented in the CEE portfolio. Romania should follow close behind, after seeing a very dynamic beginning to the year following a longer period of underperformance; we see the valuation of the BET as very attractive, with a 2013e P/E ratio of 6.1. The state-regulated, high divi-dend ratio increases the attractiveness of the Romanian market, which we consequently overweight by 1.5 per-centage points.

Due to its size and liquidity, the Polish equity market also remains interesting. The decline in earnings anticipated for this year has probably already been priced in and hopes for improvement during the year should entice in-vestors back to this market. Poland is also overweighted by 1.5 percentage points.

The Russian MICEX looks less attractive, as this market should suffer from the gloomier economic outlook and weak projected growth in aggregate earnings for 2013. Nor will oil prices provide much support in the second quarter. The performance expectations for the Czech PX are also lower than for the other CEE countries. We con-sequently underweight both of the equity markets 1.5 per-centage points.

Veronika Lammer

Portfolio weightings: stocks

Portfolio Benchmark Difference

Czech Republic 13.5% 15.0% -1.5%

Hungary 12.0% 12.0% 0.0%

Poland 26.5% 25.0% 1.5%

Russia 38.5% 40.0% -1.5%

Croatia 3.0% 3.0% 0.0%

Romania 6.5% 5.0% 1.5%Source: Raiffeisen RESEARCH

10 2nd quarter 2013

Focus on

CEE governments have demonstrated good resolve in tackling loose fiscal policies from the past. A fair amount of fiscal consolidation took place between 2010 and 2012. Nevertheless, the consolidation path was not straightforward since a large bulk of the fiscal consolidation occurred when the eurozone crisis escalated. So far, the recession scare brings the old question back as to what fiscal policy CEE governments should pursue in such a situation. Perhaps incidentally, we find no clear evidence suggesting that fiscal consoli-dation automatically results in excessive output loss. Consequently, we see no evidence in favour of excessive fiscal packages in CEE, as proven by the fairly uneven and often modest response of regional economies to the stimulus. Also, the success of the fiscal measures remains highly dependent on the package design and implementation quality, as well as the overall strength of the economy to ab-sorb such stimulus. This perhaps explains the phenomenon of Russia and Ukraine, both of whom suffered tremendous economic losses despite the major stimulus applied by their governments during the crisis.Another exemplary issue is the impact of fiscal loosening on public debt. It is no secret that the majority of CEE governments had modest and sometimes very little public debt as measured relative to GDP, and compared very favourably with many developed markets. However, fiscal loosening and difficult economic conditions led to the rapid accumulation of new debt and the sharp deterioration of their public finances. IMF recommends emerging markets should attain a level of public debt that does not exceed 40% of GDP. If we applied a conservative approach using the IMF recommendation for public debt in emerging markets, we would find the majority of CEE countries in breach of the limit.We also apply the IMF approach, which measures financing sustainability by using the difference between the real interest rate on public debt and the real GDP growth rate (r-g ratio). Consequently, a positive difference underlines the higher risk of a debt stock increase. Despite the IMF sample not including all CEE countries, we find that except for Russia and Estonia, who have small public debt, the r-g ratio points towards a higher risk of debt growth for the rest of CEE and requires an urgent response, including belt tightening.Since governments also borrow in foreign currencies and sell debt to non-resi-dent investors we cannot ignore currency risk and ownership concentration. As we can see, nearly all CEE countries depend on foreign capital and have for-eign liabilities that substantially exceed their foreign assets. The only exception is Russia, which receives hefty trade surpluses from energy commodity trading. Although a negative NIIP (Net international investment position) is fairly common for many fast-growing developing countries, it is alarming that the debt-to-export ratio stands at over 150% for the majority of countries, higher than normal, while for Romania it exceeds 200%. All in all, this emphasises the higher external risk, since CEE countries might find it difficult to sustain a higher debt leverage in times of market volatility and global financial crises.

Fiscal consolidation is the right answer1

Fiscal consolidation vs. output gap

Fiscal stimulus vs. output gap 2009

Fiscal consolidation = public balance % GDP 2012 mi-nus balance 2009, GDP gap = actual GDP growth rate % minus mid-term potential GDP inverted scaleSource: Thomson Reuters, Raiffeisen RESEARCH/RBI

Fiscal stimulus = public balance % GDP 2009 minus 2004-08 average, GDP gap = actual GDP growth rate % minus mid-term potential GDP, inverted scaleSource: Thomson Reuters, Raiffeisen RESEARCH/RBI

Public finances, % GDP

Data as of 2012, Maastricht defined levels for fiscal defi-cit and public debt are minus 3% and 60% respectively, fiscal balance inverted scaleSource: Thomson Reuters, Raiffeisen RESEARCH/RBI

PL

HU

CZ

SK

SI

BG

HR RO

RS BY

RU

UA

(6)

(5)

(4)

(3)

(2)

(1)

--5 0 5 10

GDP gap

2012

Deficit reduction 2010-12

PL

HU

CZ

SKSIBGHRRO

RSBY

RU

UA

(25)

(20)

(15)

(10)

(5)

--5 0 5 10 15

GDP gap

Fiscal stimulus

PL

HU

CZ SK

SI

BG

HR

RO

RS

BYRU

UA

(7)

(6)

(5)

(4)

(3)

(2)

(1)

-0 50 100

Fisc

al b

alan

ce

Public debt

Uns

usta

inab

leUnderpressure

Sustainable

Today, many CEE governments would be less flexible in raising their spending and rolling out new fiscal stimulus Elevated public debt for many CEE governments requires fiscal tightening We believe that revenue-boosting measures alone will not fully compensate for the lack of spending cuts Thus we believe CEE governments will be better served by preserving fiscal discipline

1 This section is only a summary of our Special “CEE public finances”, 28 Mar 2013, feel free to request your electronic copy of the report or please visit Raiffeisen RESEARCH site http://www.raiffeisenresearch.at

112nd quarter 2013

Special

Selective EM countries r-g, %

Private debt trends, % GDP

“r-g” is the difference between the real interest rate on public debt and the real GDP growth rate (r – g) is an important driver of debt dynamics, positive difference un-derscores higher risk of debt stock increase Sources: IMF staff estimates and projections, IMF Fiscal Monitor 10/12

Selective EU and CEE economies, private debt includes obligations of private sector entities and households in all currencies, private debt stock as of 2011 eop, private debt increase from 2001 to 2011 eop, all in % GDPSources: Eurostat, Raiffeisen RESEARCH

One more aspect we find important in this context is the share of public debt in foreign currency and the share of non-resident investors in total government debt. The higher reliance of the public sector on foreign borrowing and foreign investors increases governmental vulnerability to sudden market shocks and credit crunches like we saw during the 2009 crisis.In fact, CEE governments remain the largest issuers of sovereign eurobond debt, with a share of new placements accounting for a good 71% of overall EM place-ments in 2012 and nearly 81% since the start of 2013. Although there is no particular issue of concern at the moment in terms of public debt currency compo-sition and foreign participation, we must re-emphasise the importance of market confidence in conjunction with a country’s overall external vulnerability and fiscal position. Consequently, CEE governments must pursue economic policies which are consistent with the economic situation and market risk perception. Another common consequence of fiscal consolidation is the negative impact on government output. Interestingly, the share of government output for CEE is not overly different from that in developed EU states. Although hiking taxes is the normal response for governments in stress situations, the governments also need to strike a delicate balance so as not to overdo the taxation, which otherwise can be damaging for economic confidence. After conducting a review of literature, we agree with the following statements. First of all, there is a growing consen-sus among experts that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. This is because economic growth ultimately comes from production, innovation, and risk-taking. Secondly, raising consumption taxes, whilst at the same time lowering taxes on labour and capital, can stimulate an economy’s growth forces.2

We assume that the lower the tax burden is on the economy, the more flexible the government can be in raising taxes. So far, for many CEE economies except Hungary, the tax burden does not look overly high. A bunch of CEE countries have a tax burden below 30% of GDP, while even for higher-income CEE states this is less than 40% of GDP, with Hungary bearing the highest ratio. Still, we cannot ad-vocate any straightforward conclusion because many poorer CEE countries also suffer from lower tax collection rates, and many have fairly large shadow econo-mies, which can complicate the task. Incidentally, the size of the shadow economy is fairly large in the majority of CEE states. This in turn can impact on government tax collection efforts, especially in crises. So far it is not only tax increases that will be necessary for CEE but a strengthening of fiscal administration too. We also recall the Laffer Curve explaining why overly high taxation decreases revenue col-lection after a certain point (www.laffercenter.com/arthur-laffer/the-laffer-curve).In the end we found no clear evidence to suggest that a large fiscal stimulus will automatically deliver a proportionately large boost to the domestic economy. Moreover, for the majority of CEE governments the main task will be to stabilise public debt at an affordable level. We have identified no government in CEE which could safely opt for fiscal loosening just now. We also find financing and external vulnerabilities high for most CEE countries, which advocates against fis-cal complacency and does not favour lax policies. As a result there is no space for the majority of CEE countries to loosen the fiscal strings, unless they can achieve sustainable deficit levels allowing them to stabilise public debt ratios in GDP terms.

Gintaras Shlizhyus

2 ‘’What Is the Evidence on Taxes and Growth?’’ by William McBride Chief Economist at the Tax Foundation December 2012, ‘’The impact of tax systems on economic growth in Europe’’ by Deutsche Bank (DB) Research October 2012

-15

-10

-5

0

5

10

BG HU TR ZA LV MX IN CNReal effective interest rate (r)Real GDP growth (g)Interest rate–growth differential (r–g)

BG

CZ

EELV

LT

HU

PLRO

SI

SK

PT

GR

ES

IT

-

50

100

150

200

250

300

0 50 100 150Private debt increase

Priv

ate

debt

stock

unsustainable, high risk

stabili-zation needed

acceptable

Fiscal Indicators Index by Region

2002–12 (Scale, 0–1); 2009 GDP weights at purchas-ing power parity used to calculate weighted averages. Larger values of the index suggest higher levels of fiscal vulnerabilitySources: Baldacci and others (2011); IMF Fiscal Moni-tor 10/12

0.00

0.15

0.30

0.45

2002 2004 2006 2008 2010 2012Latin AmericaEmerging AsiaEmerging Europe

12 2nd quarter 2013

Austria

In the fourth quarter of 2012 Austrian economic output declined for the first time since Q1 2010, but the contraction of 0.1% qoq in real GDP was relatively small (Eurozone: -0.6% qoq). Furthermore, weaker economic performance had already been anticipated for the final quarter of 2012. In Q4, it was private consumption that made the largest negative contribution to economic growth. Net exports also had a negative impact on the quarterly GDP growth rate, due to a significant deterioration in export growth (from +0.9% qoq in Q3 to -0.3% qoq in Q4), stemming from the development of goods exports. By contrast, con-struction investment was relatively robust, but the performance was slightly less dynamic than in the previous quarter. All in all, the Austrian economy expanded at a rate of 0.8% in real terms in 2012.

Even though the next few months are not expected to be a boom period for the Austrian economy and more significant acceleration is only expected for the second half of the year, it is quite likely that the decline in real GDP in the last quarter of 2012 was the low point.

While it is true that purchasing managers’ indices for manufacturing as well as business confidence have not returned to expansionary territory, strong gains have been seen in both of these leading indicators in the previous months. At the same time, consumer confidence has improved even more since bottoming out in September 2012, but one must also keep in mind that this indicator pre-viously declined stronger than industrial confidence. Furthermore, readings for consumer confidence continue to be lower than the long-term average. Another factor is that retail sales – which fell 0.3% in 2012 – are still not yet suggesting any rebound in actual consumer demand. Private consumption is only expected to pick up more strongly during the second half of 2013. While the develop-

Austria – Is the economy past the trough?

Industrial sector: Outlook brightened

Perceived inflation now lower



Key economic figures and forecasts

2011 2012 2013e 2014f

Real GDP (% yoy) 2.7 0.8 0.5 1.5

Private consumption (% yoy) 0.7 0.4 0.4 1.3

Gross fixed capital formation (% yoy) 7.3 1.3 0.9 3.3

Nominal exports (% yoy) 11.0 4.3 3.8 7.4

Nominal imports (% yoy) 11.0 3.4 3.9 8.1

Trade balance (EUR bn) 10.0 11.9 12.3 11.9

Current account balance (EUR bn) 1.7 4.6 3.2 3.0

General budget balance (EUR bn)* -7.5 -9.6 -8.3 -5.9

General budget balance (% of GDP)* -2.5 -3.1 -2.6 -1.8

Unemployment rate (avg, %, EU definition) 4.2 4.4 5.0 4.8

Consumer prices (avg, % yoy) 3.6 2.6 1.9 2.0

Real wages (% yoy) -1.0 0.2 0.8 0.4

Unit labour costs (% yoy) 0.8 3.4 2.4 2.0* state, provinces, municipalities and social security authoritiesSource: Statistics Austria, Thomson Reuters, Raiffeisen RESEARCH

757779818385878991

-50-40-30-20-10

0102030

2002 2004 2006 2008 2010 2012Industrial production (% yoy)Industrial confidenceCapacity utilisation (%, r.h.s.)

-8

-6

-4

-2

0

2

4

6

8

2009 2010 2011 2012 2013

Inflation (HICP, % yoy)

Prices of weekly bulk purchase (% yoy)

Mild (qoq) decline in Q4 2012, GDP should mark the cyclical bottom Leading indicators point to economic revival as the year progresses Employment at a high level, but only lacklustre consumption development Inflation (yoy) to fall in the months ahead

132nd quarter 2013

Austria

ment of employment continues to be surprisingly stable, the number of registered unemployed is rising sharply in year-on-year terms. Due to the lagging nature of the la-bour market, a recovery in economy activity will probably be felt relatively late there. At any rate, the sharp decline in the number of vacancies means that a turnaround on the labour market looks unlikely in the near future.

In the industrial sector, sentiment has clearly improved in recent months, but here again confidence has still not yet returned to the long-term average level. In contrast to private consumption, however, some initial signs of a rebound are being seen here. For instance, industrial pro-duction rose by 3.5% mom in December (seasonally ad-justed). As a result, the base effect for Q1 2013 amounts to 1.9% qoq. Furthermore, capacity utilisation is judged to be slightly higher again, and with demand picking up this may prompt companies to undertake more investment in capacity expansion. Following subdued developments at the beginning of this year, we expect investment activity to pick up in the second half of the year, which also ap-plies to exports. For example, the Raiffeisen Export Index, which weights the leading indicators of Austria’s most im-portant export countries based on their significance for Austrian goods exports, has improved continuously in re-cent months. For 2013 as a whole, we expect GDP growth of 0.5% in real terms, followed by 1.5% next year.

Inflation (HICP) is currently at an elevated level (February: 2.6% yoy), but has already come down somewhat from the peak registered at the end of 2012 (December: 2.9% yoy). In the months ahead, further declines are expected which should bring down the inflation rate to 1.9% in 2013, from 2.6% in the previous year, followed by a slight increase to 2.0% in 2014. Price inflation for essen-tial goods (mini basket of goods and services – weekly bulk purchase) has fallen tangibly and is for the first time since end-2009 lower than the overall rate of inflation (HICP).

Matthias Reith

GDP: expenditure composition

Change (% yoy, in real terms) 2011 2012 2013e 2014f

Private consumption 0.7 0.4 0.4 1.3

Public consumption 0.1 -0.2 0.5 0.6

Gross fixed capital formation 7.3 1.3 0.9 3.3

Equipment 12.1 0.3 0.5 4.0

Construction 4.4 1.5 1.3 2.7

Exports (broad definition) 7.2 1.7 1.9 5.3

Imports (broad definition) 7.2 0.8 1.9 6.0

Gross domestic product 2.7 0.8 0.5 1.5Source: Statistics Austria, Raiffeisen RESEARCH

GDP: value added by sector

Change (% yoy, in real terms) 2011 2012 2013e 2014f

Agriculture & forestry 15.3 -8.7 0.0 0.0

Prod. of goods/mining 8.2 1.1 1.0 3.0

Energy/water supply 8.2 13.1 3.0 1.0

Construction 3.5 1.9 1.0 1.5

Wholesale and retail trade 1.3 -1.4 -0.5 1.5

Transportation 1.0 -0.3 0.3 0.7

Accom. & restaurant trade 1.3 -0.4 0.2 1.0

Information and communication -0.9 -1.3 -0.4 1.0

Credit and insurance 1.4 -2.5 -0.5 2.0

Property & business services 2.6 2.1 1.0 1.5

Other economic services 2.2 1.0 1.0 2.5

Public sector -0.7 0.3 0.2 -0.1

Healthcare, social services 1.4 1.4 0.6 1.4

Other services 0.0 0.8 0.5 0.8

Gross domestic product 2.7 0.8 0.5 1.5Source: Statistics Austria, Raiffeisen RESEARCH

Contributions1 to real GDP growth (qoq)

1 in percentage pointsSource: Thomson Reuters, Raiffeisen RESEARCH

-0,5-0,4-0,3-0,2-0,10,00,10,20,30,40,50,6

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

Private Consumption Public Consumption InvestmentStocks External Trade Real GDP

Forecast

14 2nd quarter 2013

-6-4-202468

10

2008

2009

2010

2011

2012

2013

e

2014

f

Real GDP (% yoy)Industrial output (% yoy)

Real GDP (% yoy)


Poland

Slowdown bottoming out – 2013 unlikely to be strong bond year

424446485052545658-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

2013

e

2014

f

General budget balance (% of GDP)Public debt (% of GDP, r.h.s.)

Budget balance and public debt


Forecast


2008 2009 2010 2011 2012 2013e 2014f

Nominal GDP (EUR bn) 362.9 311.1 354.7 369.3 381.7 401.8 431.1

Real GDP (% yoy) 5.1 1.7 3.9 4.3 2.0 1.2 2.5

Industrial output (% yoy) 3.6 -4.5 9.0 7.7 1.4 0.5 3.0

Unemployment rate (avg, %) 9.8 11.0 12.1 12.4 12.8 14.0 12.8

Nominal industrial wages (% yoy) 10.3 4.4 3.3 5.0 3.5 2.8 3.3

Producer prices (avg, % yoy) 2.2 3.4 2.1 7.6 3.3 0.6 3.0

Consumer prices (avg, % yoy) 4.2 3.5 2.6 4.3 3.7 1.6 2.2

Consumer prices (eop, % yoy) 3.3 3.5 3.1 4.6 2.4 2.0 2.5

General budget balance (% of GDP) -3.7 -7.4 -7.9 -5.0 -3.5 -3.4 -2.8

Public debt (% of GDP) 47.1 50.9 54.8 56.4 56.1 56.1 53.8

Current account balance (% of GDP) -6.6 -3.9 -5.1 -4.9 -3.5 -3.0 -3.9

Official FX reserves (EUR bn) 44.1 55.2 70.0 75.7 82.6 87.0 91.0

Gross foreign debt (% of GDP) 47.9 62.5 66.9 67.2 71.3 70.9 69.6

EUR/PLN (avg) 3.52 4.33 3.99 4.12 4.19 4.09 4.00

USD/PLN (avg) 2.39 3.10 3.01 2.96 3.26 3.05 3.01


Forecast

Economic outlookIn Q4 2012 GDP growth slowed down to 1.1% yoy, decelerating from average growth of 2.4% in the first three quarters of the year. Once again, growth was fully generated by net exports while internal demand declined by 0.7% yoy. The Polish economy remains on a slowing trend which is mostly reflected in private consumption and investments. In Q4 2012 private consumption declined by 1% yoy, marking the first negative rate in the history of this data series. Households’ low willingness to buy will probably persist into H1 2013, due to the high un-employment (currently exceeding 14%) and nominal wage growth ranging near its historical lows in 2012, due to high inflation (resulting in negative real wage growth) and unsupportive consumer confidence. As the beginning of 2013 fea-tured a surprisingly steep decline in inflation, the negative impact of this factor on private consumption will fade. We consequently expect limited declines in consumption in H1 2013, and project modest growth returning in Q3 and Q4.Apart from unusually weak consumption, the Polish economy is suffering from tight fiscal policy and falling public investments, which are linked to EU funds. As new flows of funds from the 2014-2020 fiscal period are expected to appear in the economy in 2015 at the earliest, this factor will generate no momentum for the economy for the next two years at least. Slack public investment is ac-companied by negative developments in private gross fixed capital formation and an almost neutral contribution from inventories. As a small open economy the main positive driver for growth may come from the external environment. This means that – in line with the slowly improving German economy (as the main trading partner) and low base effects – the Polish economy should show some initial signs of improvement in H2 2013 when we expect GDP growth to average 1.4%-1.6% yoy.

Commitment to tight fiscal stance not growth supportive, but supports leave from EU Excess Deficit Procedure Tangible slowdown of economy resulting in inflation well below target, which creates upside for real wage growth No more rate cuts expected, flows into and out of the bond market could influence EUR/PLN in the months ahead Bond yields still well anchored at current low levels, while there might be some gradual upshift going forward

152nd quarter 2013

3.03.23.43.63.84.04.24.4

0 1 2 3 4 5 6 7 8 9 10Yields as of Mar-13Yield curve Mar-13Yield curve Dec-12Forecast Jun-13

3.7

3.9

4.1

4.3

4.5

4.7

Mar-11Sep-11Mar-12Sep-12Mar-13Sep-13EUR/PLN (eop)

Poland

Exchange rate development


PLN yield curve (%)


Forecast

Exchange rate forecasts

21-Mar1 Jun-13 Sep-13 Dec-13Mar-14

EUR/PLN 4.19 4.17 4.10 4.00 4.00

Cons. 4.10 4.07 4.04 4.08

USD/PLN 3.25 3.09 3.08 2.96 2.96

Cons. 3.12 3.13 3.15 3.161 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Interest rate forecasts

21-Mar1 Jun-13 Sep-13 Dec-13 Mar-14

Key rate 3.25 3.25 3.25 3.25 3.25

Consensus 3.38 3.25 3.25 3.38

1 month2 3.19 3.38 3.40 3.40 3.40

3 month2 3.19 3.42 3.50 3.50 3.50

6 month2 3.20 3.63 3.63 3.63 3.70

12 month2 3.20 4.00 3.95 4.00 4.101 5:00 p.m. (CET) 2 Bid rateSource: Bloomberg, Raiffeisen RESEARCH

Yield forecasts


2y T-bond2 3.13 3.17 3.08 3.17 3.41

Cons. 3.18 3.33 3.41 3.66

5y T-bond2 3.43 3.44 3.42 3.50 3.70

10y T-bond2 3.94 3.92 3.91 3.98 4.13

Cons. 3.96 4.04 4.19 4.341 5:00 p.m. (CET) 2 Ask yieldSource: Bloomberg, Raiffeisen RESEARCH

Weak internal demand and sub-potential GDP growth are generating deflation-ary pressures. The latest inflation report projects that the negative output gap will remain until end-2014. Unsupportive GDP growth projections and inflation fore-casts point to a risk of the CPI staying at the bottom of target range (1.5%-3.5%) in 2015 as well, and this has encouraged the Polish MPC to move ahead with further cuts in interest rates to 3.25%. In our view, the 50bp cut in March most probably marks the end of the MPC’s rate-cutting cycle and central bankers will now move into “wait-and-see” mode. This scenario, which is also suggested by the MPC members themselves, is coherent with our view of the Polish economy bottoming out in mid-2013 and inflation peaking to its 2.5% target in 2014.

Financial markets outlookEarly 2013 saw some weakening of the Polish currency as EUR/PLN reached a 4-month high at over 4.21. The main source of this was local factors which gained importance once the slowdown began to pose a threat of the Polish economy slipping into recession. Although recent data provide a much more optimistic view, the drop in inflation which prompted the MPC to cut interest rates by 100bp during the last 3 months also kept PLN under pressure. On the other hand, as we expect that the MPC concluded the easing cycle with the last 50bp cut, monetary policy in Poland should no longer provide reasons for any significant weakening of the currency, even though to some extent the market still seems to believe in the possibility of more cuts (as indicated by FRA quota-tions). From the perspective of external factors, there are still several risks which should limit the appreciation potential of the zloty in Q2 or even cause temporary weakening. In the short term, Eurozone uncertainties may still cause increased risk aversion while in the medium term the main condition for the expected EUR/PLN decrease towards 4.0 in H2 2013 is the assumption of a recovery in the Eurozone economy. This improvement should support market sentiment as well as provide an impulse for higher GDP dynamics in Poland. Apart from the external situation the risk for PLN still stems from the record high share of foreign inves-tors on the Polish sovereign bond market (now above 35%). A sudden outflow of foreign capital could weaken the currency as well as lead to further increases in yields. However, even though we see it as highly probable that some of the (speculative) inflow from 2012 will be reversed later in the year, it should not be a sudden retreat as some investors will still find it attractive to allocate or keep funds on the Polish market. Positive investor sentiment on Poland was enhanced lately by the revision of the Polish rating outlook to positive by Fitch. Furthermore, even though fiscal consolidation may slow down the Excess Deficit Procedure is still likely to be lifted in 2013, confirming the sound fiscal position.

Marta Petka-Zagajewska, Dorota Strauch

16 2nd quarter 2013

-20-16-12-8-404812

-10-8-6-4-20246

2008

2009

2010

2011

2012

2013

e

2014

f

Real GDP (% yoy)Industrial output (% yoy, r.h.s.)

0

50

100

150

200

2008

2009

2010

2011

2012

2013

e

2014

f

Public debt (% of GDP)Gross foreign debt (% of GDP)

Real GDP (% yoy)


Hungary

Government desperately seeking growth

Public and external debt


Forecast

Forecast


2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 0.9 -6.8 1.3 1.6 -1.7 -0.5 1.5

Industrial output (% yoy) 0.0 -17.8 10.6 5.4 -1.7 1.0 4.0






General budget balance (% of GDP) -3.7 -4.6 -4.2 4.3 -2.4 -3.0 -3.4


Current account balance (% of GDP) -7.1 -0.2 1.0 0.9 1.4 1.8 1.5



EUR/HUF (avg) 250.75 280.10 275.50 279.32 289.20 297.50 290.00

USD/HUF (avg) 170.48 200.91 207.69 200.69 224.95 222.01 218.05


Economic overviewEconomic activity declined massively in Q4 2012 (GDP -2.7% yoy; -0.9% qoq), with all the remaining previously positive factors slipping into negative territory (i.e. manufacturing output, exports). For 2012 as a whole, GDP contracted by 1.7%. Hungary has already been through seven lean years, and the country’s GDP is now roughly on par with the level it achieved in 2005.The government is desperately looking for a turnaround in the economy in 2013, as there is only one year to go until the next elections (April 2014). The outlook is not particularly encouraging though. Domestic demand is expected to stagnate (with both household and private consumption to turn mildly positive, but gross fixed capital formation to remain in the red). Export performance mostly depends on EU economic activity (not too promising) and local export capacities (a major increase in the automotive industry, a worrisome track record for the electronics industry). Agriculture is unlikely to provide a negative surprise again (almost half of the GDP contraction in 2012 came from agriculture). The government is going about its job in an unorthodox manner: households are to benefit from the compulsory utility price cuts (affecting heating, electricity, water, sewage, waste management, etc.). Inflation is likely to be at around 3% on average. The initial 10% utility price cut might be followed by further cuts before the elections. A public sector wage increase would also be a potential tool to stimulate private consumption demand. While the room for such action is limited by the fiscal situation, such considerations might be shrugged off as political rivalry heats up.The problem, however, is in the private sector. The currently available incentives proposed by the government to invest and create jobs have not been able to trig-ger a turnaround. More policy actions are likely to come. Nevertheless, as the

Massive decline in Q4 2012 – full year GDP contracted by 1.7% Government desperately looking for growth Further policy measures expected with questionable outcome HUF and bond market remain susceptible for weakening

172nd quarter 2013

Hungary

260

270

280

290

300

310

320

Mar-11Sep-11Mar-12Sep-12Mar-13Sep-13

EUR/HUF (eop)



4.0

4.5

5.0

5.5

6.0

6.5


HUF yield curve (%)


Forecast



EUR/HUF 306.69 305.0 290.0 290.0 290.0

Cons. 287.0 284.0 286.0 280.0

USD/HUF 237.52 225.9 218.0 214.8 214.8




Key rate 5.25 4.25 4.25 4.25 4.25

Consensus 4.88 4.88 4.88 5.00

1 month2 5.25 4.30 4.30 4.30 4.30

3 month2 5.12 4.35 4.35 4.35 4.35

6 month2 5.05 4.40 4.40 4.40 4.73


Yield forecasts


2y T-bond2 4.81 4.85 4.80 4.75 5.25

Cons. n.v. n.v. n.v. n.v.

5y T-bond2 5.73 5.70 5.60 5.50 5.50

10y T-bond2 6.39 6.40 6.30 6.20 6.20


nature and outcome of such measures are rather uncertain, we keep our -0.5% GDP forecast for 2013.

Financial market outlookThe projected depreciation of EUR/HUF towards 300 in Q1 proved to be correct as a new central bank governor, continued unfavourable economic development and the general (internal and external) uncertainty took its toll. Clearly, the cur-rent environment does not provide much support for HUF strengthening back below 300 to the euro, as the economy is likely to continue underperforming its regional peers and uncertainties regarding the unconventional policies persist. Additionally, with the changes at the central bank the unconventional measures used by Hungarian policymakers may be expanded to the central bank as the political sway over monetary policy has risen considerably. On the other hand, a lot of worries have now been priced into EUR/HUF. It must be stressed, how-ever, that there are numerous threats (unorthodox policy by the central bank, populist measures in politics, too aggressive interest rate cuts, external shocks, etc.) that could lead to a stronger correction in EUR/HUF and a change in market assessment.Nevertheless, for Q2 2013 we do not forecast this as our baseline scenario. Instead, we project a volatile sideways movement around the level of 300-310. Given the current internal and external market environment, however, we would not rule out occasional short-term movements that could push EUR/HUF above levels of 310. Even though we would view such phases as short-term exaggera-tions the risk of HUF weakening is evident.With respect to the bond market, the rate-cutting cycle continued in Q1 2013 as expected with 25bp rate cuts each month. In previous months the cutting cycle was continued despite the elevated inflation rates, and we do not expect the weaker forint to prevent the council from cutting further in Q2. Given the composition of the monetary council, we project the rate-cutting cycle to continue and expect cuts to 4.25% by mid-2013. Nevertheless, with falling interest rates the risk premium continues to decline and at levels of about 4%-4.5% the room for further cuts will be exhausted in our view, as the risk premium would not be sufficient for investors anymore and additional cuts would excessively increase pressure on the forint.The rate cuts will lead to a further steepening of the yield curve in the second quarter as the long end of the curve will most likely not see any fall in yields given the ongoing economic weakness and political uncertainties. In light of these assumptions, we are neutral on Hungarian government bonds for the sec-ond quarter. Nevertheless, numerous uncertainties – especially in the political realm – entail risks for Hungary that could turn the scenario towards the worse.

18 2nd quarter 2013

-15

-10

-5

0

5

10

15

-6

-4

-2

0

2

4

6

2008

2009

2010

2011

2012

2013

e

2014

f


Czech Republic

20

25

30

35

40

45

50-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

2013

e

2014

f

General budget balance (% of GDP)

Public debt (% of GDP, r.h.s.)

Real GDP (% yoy)


Recovery around the corner?



Forecast

Forecast


2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 2.9 -4.7 2.7 1.7 -1.2 -0.2 1.8

Industrial output (% yoy) 0.4 -13.4 10.1 6.9 -1.2 -0.1 3.2



Producer prices (avg, % yoy) 4.5 -3.1 1.2 5.6 2.1 1.7 2.5








EUR/CZK (avg) 24.90 26.40 25.28 24.59 25.10 25.30 24.50

USD/CZK (avg) 16.93 18.94 19.06 17.67 19.52 18.88 18.42


Economy expected to gradually recover from Q2 2013 onwards Czech government weakened, but key reforms already enforced No continuation of EUR/CZK appreciation trend before H2 2013 Small increase of yield curve slope expected for Q2 2013

Economic outlookThe recession in the Czech economy continued in Q4 as GDP fell by 0.2% qoq and 1.7% yoy. It has been in recession for one year, but the structure of GDP has changed. During the first three quarters, it was internal demand and especially household consumption that caused the contraction. In the fourth quarter, how-ever, net exports was the cause of the contraction. Household consumption in-creased by 0.9% qoq in Q4 – probably due to a one-off rise before the VAT hike in 2013. Government consumption also expanded, by 1.0% qoq. However, the negative news was that fixed investment shrank by 3.8% qoq, although overall investment was up due to inventory investment. Net exports contributed nega-tively due to the recession in the Eurozone. Apart from the poor “hard data”, we have seen some signs of improvement: leading indicators (PMI indices, Ifo) have improved, Czech industrial output increased by 0.9% mom in December and retail sales increased at the beginning of the new year, despite the VAT hike. We still believe that the Czech economy will recover gradually starting from Q2, partly because of the positive developments in the above mentioned indicators, partly because the Czech economy could be close to the bottom of the business cycle and, last but not least, because of the assumed recovery in the Eurozone. We still forecast a mild annual decline of 0.2% in 2013, with the only qoq de-cline projected for Q1, which could be negatively affected by the VAT hike.The Czech government remains weak, holding only a fragile majority in parlia-ment. But this is no tragedy, given that the government has already enforced key reforms (pension reform, church restitutions). Austerity will continue in 2013 and accordingly the general government deficit is expected to decline below the Maastricht threshold of 3% of GDP this year. In 2014, the budget should be mildly expansive.

192nd quarter 2013

Czech Republic

24.0

24.4

24.8

25.2

25.6

26.0


EUR/CZK (eop)



0.0

0.5

1.0

1.5

2.0

2.5

0 1 2 3 4 5 6 7 8 9 10

Yields as of Mar-13Yield curve Mar-13Yield curve Dec-12Forecast Jun-13

CZK yield curve (%)


Forecast



Key rate 0.05 0.05 0.05 0.05 0.05

Consensus 0.05 0.05 0.08 0.16

1 month2 0.05 0.05 0.05 0.05 0.05

3 month2 0.16 0.15 0.20 0.20 0.20

6 month2 0.23 0.23 0.28 0.30 0.33


Yield forecasts


2y T-bond2 0.04 0.10 0.20 0.20 0.30

Cons. 0.33 0.46 0.61 0.76

5y T-bond2 0.82 0.90 1.20 1.40 1.40

10y T-bond2 1.78 2.10 2.10 2.50 2.50




EUR/CZK 25.79 25.40 25.20 24.80 24.80

Cons. 25.40 25.30 25.40 25.40

USD/CZK 19.97 18.81 18.95 18.37 18.37


Milos Zeman, a populist, ex-prime minister, and ex-leader of the Social Demo-crats (CSSD), became president. If the CSSD, which leads the polls, set up a future government a “left” president could be advantage for them.

Financial market outlookIn Q1 2013 the Czech koruna was moving in a range EUR/CZK 25.20-25.70. The fear of some market players that the Czech National Bank (CNB) would intervene directly on the FX market against CZK was not fulfilled. The central bank expects the following development of the exchange rate: EUR/CZK 25.50 in Q1, EUR/CZK 25.30 in Q2, EUR/CZK 25.10 for end of 2013. The CNB will probably perceive that the exchange rate implied by its forecast is appropriate. Therefore, in the short term the market’s anticipation of the CNB forecast deter-mines the exchange rate significantly. At the same time the exchange rate will be determined by the new data flow. We expect that the macroeconomic data that will be incorporated into the next CNB forecast (release on 2 May) will still be on the weaker side. Therefore, the CNB forecast will foresee a similar exchange rate as in the recent forecast or even slightly weaker. We project that CZK will appreciate towards EUR/CZK 25.0 in H2 2013 when, apart from improvement in the data, the market might anticipate an improving outlook for 2014.

In Q1 2013 the Czech government bond yield curve ticked only marginally upward. With the bid yield on 10-year Czech government bonds around 2%, financing Czech government debt is quite an easy job. For 2013 the gross fi-nancing needs will drop by CZK 79 bn to CZK 231 bn. In 2012 the Ministry of Finance covered the planned financing requirements as early as October and increased that by additional reserves accumulation of CZK 72 bn. The position of the Czech government with regards to financing on the bond market remains fa-vourable. In 2013 the government is sticking with the austerity measures to keep the deficit low (this was artificially increased in 2012 by 150bp due to church restitution) and this limits the room for GDP growth. Consequently domestic de-mand for Czech government bonds will likely remain solid. Fundamentally we therefore do not expect any widening of the spread over German benchmarks unless there is an unexpected event that increases risk aversion. Given our out-look for the Czech economy and the assumption for German Bunds, we expect that Czech bond yields will slightly rise in H2 2013. For Q2 we expect only small increase of the slope of the government bond yield curve, as we think that the economy reached the bottom of the current business cycle in Q1 2013.

Michal Brozka, Vaclav France

20 2nd quarter 2013

Slovakia

0

15

30

45

60

75-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

2013

e

2014

f





Forecast

-15-10-505101520

-6-4-202468

2008

2009

2010

2011

2012

2013

e

2014

f


Lower growth – more efforts to meet deficit target

Forecast

Real GDP (% yoy)

One-off effect from strong automotive year is slowly petering out, domestic economy close to stagnation Expected GDP growth rate in 2013 more or less at the level of other “core” Eurozone countries like Germany Fiscal consolidation remains high on political agenda with an increasing focus on the expenditure side Achieving fiscal consolidation will be key to keep tight government bond spreads anchored at current levels


2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 5.8 -4.9 4.4 3.2 2.0 0.9 2.5




Producer prices (avg, % yoy) 5.0 -2.5 -2.8 2.6 3.9 2.3 3.4





Current account balance (% of GDP) -6.0 -2.6 -3.7 -2.0 2.2 2.9 2.9


EUR/SKK (avg)1 31.29 Eurozone membership at EUR/SKK 30.1261 Eurozone entry on 1 January 2009Source: Thomson Reuters, Raiffeisen RESEARCH

Economic growth in the Slovak economy decelerated remarkably on a yoy basis from +2.1% in Q3 2012 to +0.7% in Q4 2012. This slowdown stems from the persistently sluggish domestic demand (both household consumption and capital formation are in the red) and fading foreign demand. Even the best performing part of the economy, industry, sank into the negative domain in December 2012. Moreover, in coming quarters, domestic demand will suffer from fiscal consoli-dation and foreign demand will be dampened by the Eurozone debt crisis. As Slovakia will no longer benefit from the extraordinary increases in automotive production, headline GDP figures will be more in line with German GDP growth rates in 2013. On average, we expect the GDP growth to slow down to +0.9% yoy.

The Ministry of Finance revised down its macroeconomic and tax revenue fore-cast for the period 2013-2016. The estimated gap in 2013 will already be covered by the announced measures like tax hikes and better tax collection, and therefore, we believe that the deficit target of 3% of GDP in 2013 will be fulfilled. However, the estimated gap on the revenue side for 2014 and 2015 is at the level of around 1% of GDP and the government will have to come up with additional measures. Finance Minister Mr. Kazimir announced that they do not want to increase tax rates further, but rather focus on the expenditures side and better tax collection. Slovakia enjoys the confidence of the financial markets and is able to easily tap money even for the long term. More and more, however, the Slovak debt management agency (ARDAL) must rely on foreign investors, under-lining the need to come through on the promised decrease in the budget deficit. In such a case, the spread between Slovak and German bonds will only depend on investors’ general mood. If fiscal consolidation may not be achieved a modest spread widening vs. bunds might be in the pipeline.

Juraj Valachy, Boris Fojtik

212nd quarter 2013


2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 3.4 -7.8 1.2 0.6 -2.3 -1.0 1.0

Industrial output (% yoy) -1.6 -16.5 6.9 3.7 0.6 1.0 2.5








Current account balance (% of GDP) -6.2 -0.7 -0.6 0.0 2.4 2.7 1.3



EUR/SIT (avg)1 Eurozone membership at EUR/SIT 139.641 Eurozone entry on 1 January 2007Source: Thomson Reuters, Raiffeisen RESEARCH

Slovenia

New government, old problems

Jansa government coalition collapsed after corruption report New four party government coalition formed to prevent early election Implementation of bad bank a decisive reform step Economic outlook remains bleak for 2013

-20

-15

-10

-5

0

5

10

-8

-6

-4

-2

0

2

4

2008

2009

2010

2011

2012

2013

e

2014

f


0

50

100

15020

08

2009

2010

2011

2012

2013

e

2014

fPublic debt (% of GDP)Gross foreign debt (% of GDP)

Real GDP (% yoy)


Public and external debt


Forecast

Forecast

After Jansa’s government coalition broke up due to corruption charges against Jansa a new four-party coalition headed by Alenka Bratusek was able to secure a majority in parliament. The new coalition consists of two former centre-right coalition partners of the Jansa government, as well as two left-leaning parties. According to the coalition agreement, a confidence vote is scheduled in one year to give the option of snap elections already before the next scheduled elections in 2015. With this, the most severe part of the political crisis seems to be over, and Slovenia once again has a government that is able to act. Nevertheless, there are still numerous problems that will have to be solved under time pressure in the coming months. First and foremost the decision on the implementation of a bad bank will have to be made in order to take pressure off the ailing (largely state-held) banking sector. Given the differences in the four-party coalition, which is not unanimous in its view on the implementation of such a bad bank, this could prove to be a first obstacle. Other efforts to restore the competitiveness of the economy will likewise be difficult to push through in a coalition of leftist and centre-right parties. While all parties agree on the necessity for such reforms, we remain rather cautious regarding their timely implementation. In the end a pos-sible delay would increase the chances that Slovenia will eventually have to turn to the Eurozone (European Stability Mechanism) for financial support.Meanwhile the economic outlook remains bleak. Especially on the investment side Slovenia witnessed a sharp decline during 2012 and this is likely to continue in 2013. Household as well as government consumption will also remain weak in 2013. All in all, this will add up to a continuation of the recession at least for H1 2013 with some hopes of a slight improvement in H2 2013. For 2013 as a whole, we project a decline in GDP of 1%, leaving Slovenia the economically weakest CEE country, even lagging behind trouble-plagued Hungary.

Wolfgang Ernst

22 2nd quarter 2013

-10-8-6-4-2024

2008

2009

2010

2011

2012

2013

e

2014

f


253035404550556065-8

-7-6-5-4-3-2-10

2008

2009

2010

2011

2012

2013

e

2014

f


Real GDP (% yoy)


Economic outlookThe string of negative indicators continued in early 2013, which is likely to be the fifth consecutive year of recession. This gloomy half-decade has been marked by delays in deep-reaching reforms of the public systems (such as overhauling the education, pension, health-care and social welfare systems as well as measures in the field of public enterprises), which are simply necessary in order for there to be economic growth and to increase Croatia’s competitiveness. This is particu-larly important in the context of accession to the EU on 1 July 2013, since it is evident that Croatia will not be able to use all of the benefits of EU membership arising from the huge common European market. The first half of this year will be particularly difficult when the economic downturn is driven by falling household consumption and investment. Moreover, private consumption will be suppressed for the whole year due to the low rate of employment (high unemployment), de-clines in real income and a high level of pessimism. Announced, but still uncertain reforms in the public sector will be an additional burden. In the context of weak public finances and insufficient funds, the government has already announced that it will give up certain investment projects. However, as necessary, public finances are already expected to return to the path of fiscal consolidation with the adoption of the budget revision announced for the beginning of the spring. Fiscal adjustment and structural reforms are crucial, especially considering the unsustainable growth of public debt that even without guarantees is approaching 60% of GDP. Despite the slowdown in public debt growth, stabilising the public debt-to-GDP ratio will not happen until 2015.Some optimism should arise in the second half of the year. In addition to the usual increase in optimism during the tourist season and a positive spillover to net ex-ports, we expect to see more visible impacts of investments financed by EU funds, particularly in the fields of environmental protection, (renewable) energy and

Stuck in recession



Forecast

Forecast


2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 2.1 -6.9 -2.3 0.0 -2.0 -0.5 1.0

Industrial output (% yoy) 1.2 -9.2 -1.4 -1.2 -5.5 -1.5 2.0


Nominal industrial wages (% yoy) 7.0 0.8 0.0 1.3 1.9 -1.0 0.0









EUR/HRK (avg) 7.22 7.34 7.29 7.43 7.52 7.55 7.50

USD/HRK (avg) 4.91 5.26 5.49 5.34 5.85 5.63 5.64


Recession: a never-ending story At the gateway to the EU A long hard road to get the investment-grade rating back Debt securities lacking support from fundamentals

Croatia

232nd quarter 2013

7.35

7.40

7.45

7.50

7.55

7.60

7.65

Mar-11Sep-11Mar-12Sep-12Mar-13Sep-13EUR/HRK (eop)

0123456


Croatia



HRK yield curve (%)


Forecast



Key rate 6.25 6.00 6.00 6.00 6.00

Consensus 6.00 6.00 6.00 6.00

1 month2 0.25 1.00 1.35 1.15 1.30

3 month2 0.60 1.55 1.90 1.80 1.90

6 month2 1.43 2.40 2.60 2.50 2.60


Yield forecasts


2y T-bond2 3.14 3.60 3.90 3.90 4.00


5y T-bond2 4.02 4.10 4.20 4.40 4.50

10y T-bond2 4.68 5.05 5.15 5.25 5.40

Cons. n.v. n.v. n.v. n.v.1 5:00 p.m. (CET) 2 Ask yieldSource: Bloomberg, Raiffeisen RESEARCH



EUR/HRK 7.60 7.50 7.55 7.60 7.57

Cons. 7.50 7.49 7.53 7.51

USD/HRK 5.88 5.56 5.68 5.63 5.61


transport infrastructure. The investments financed by EU funds and development banks are expected to start with recovery first since the budget funds have dried up and in terms of private investments (capital) more work has to be done in the field of removing administrative barriers, providing legal and business security and reducing the tax burden.

Financial market outlookEUR/HRK continued the year on a slow but steady upward trend approaching the 7.60 level. FX market did not react to the credit rating cut, once again confirming the shallowness of the local financial market, but at the same time underlining the awareness of market participants that the central bank is ready to preserve FX stability at the cost of liquidity and the interest rate. Nevertheless, slight deprecia-tion pressures should continue over the year due to the weak economic environ-ment, lack of capital inflows, and further FCY deleveraging. In the meantime, seasonal appreciation and pressures on HRK in the pre- and main season (from April to August) may be mitigated by a likely higher level of banking provisions for NPLs although this leads to higher coverage ratios (provision/NPL).As long as EUR/HRK remains stable, the central bank will continue to support the extremely high market liquidity, which still does not reach the real sector, but provides a cheap source of financing for the government. In line with the abun-dant liquidity in the market and in contrast to the current economic situation and growth prospects, money market interest rates as well as T-bill yields will remain at their minimal levels until the summer, followed by slow growth. Still on average in 2013 they will be considerably lower compared to the previous years.The improvement in Croatia’s CDS and bond yield (fully attributable to the im-provement in global market sentiment) is slowly melting away. The probable deterioration of market sentiment in the Eurozone (given the turmoil caused by the Italian elections) together with the weak economic environment will continue to put pressure on Croatian CDS spreads and bond prices especially, given the high public debt redemption in 2013.As Croatia still does not have an immediate liquidity problem, the government is not thinking about engagement with the IMF, although this may help overcome the domestic reform blockage. Refinancing needs will be met by yet another domestic issue, during the summer (probably in the amount of HRK 1.5 bn). As market players (especially pension funds) are craving the new issues there is no doubt about solid demand. Furthermore, the capacity to successfully roll over of debt is influenced by the willingness of local banks to extend previously granted loans that mature during this year and next year, as well as by their readiness to subscribe T-bill notes in the absence of more attractive investments.

Zrinka Zivkovic-Matijevic

24 2nd quarter 2013

Romania

0

2

4

6

8

10

12-12

-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

2013

e

2014

f

Current account (% of GDP)Net FDI (% of GDP, r.h.s.)

Real GDP (% yoy)


Focus on structural reforms amid a modest recovery

Current account and FDI inflows


Forecast

Forecast

-8-6-4-202468

2008

2009

2010

2011

2012

2013

e

2014

f



2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 7.3 -6.6 -1.1 2.2 0.3 1.5 3.0












EUR/RON (avg) 3.68 4.24 4.21 4.24 4.46 4.44 4.45

USD/RON (avg) 2.50 3.04 3.17 3.04 3.47 3.31 3.35


Recovery still modest in Q1 and Q2, but gaining momentum in H2 2013 Fiscal slippages likely to be avoided, whilst structural reforms prove difficult to implement Improving exchange rate and interest rate outlook following large foreign portfolio inflows Local bonds remain attractive, although the recent rally exhausted most of appreciation potential

Economic outlookAs a result of a large negative contribution from agriculture, real GDP growth decelerated rapidly in 2012 (falling to 0.3% from 2.2% in 2011). Also, after adjusting for volatility induced by the adverse weather conditions, Q4 2012 ap-pears to have been the worst quarter in the year. We do not expect any visible recovery in economic activity in Q1 2013 and expect GDP growth to remain subdued in Q2 as well. In the short run, support from external demand is likely to remain modest, while the recovery in domestic demand should remain sluggish. Confidence among consumer and companies is still low. Except for the already implemented measures – an increase in public wages by 7.4% in Dec 2012 and public pensions by 4% in Jan 2013 – we believe there is no room for ad-ditional stimulus in order to stick to the fiscal consolidation plan. The key focus of government policies remains on increasing the absorption of EU structural funds (positive for growth and funding the current account deficit) and on implementing structural reforms. Foreign investors’ strong appetite for Romanian government securities (local T-bonds and Eurobonds) eased concerns about public deficit financing and the country’s external funding needs. This should be positive for the leu (lower depreciation pressures) and for borrowing costs (a gradual decline in RON lending rates in the quarters ahead) and accordingly for households’ and companies’ balance sheets. Thus, we expect the recovery to gain momentum in H2 2013, in the context of an improving external and domestic environment. We project real GDP to expand by 1.5% this year, with agriculture generating a strong positive contribution to growth (at least 0.7pp). We foresee growth in real GDP excluding agriculture to be a touch below 1%, which is very modest. The pace of recovery will be determined by the ability to keep the public budget defi-cit below 3% of GDP and implement structural reforms (including the restructuring of State Owned Enterprises), which is being closely eyed by foreign investors, the IMF and the rating agencies.

252nd quarter 2013

Romania

4.0

4.1

4.2

4.3

4.4

4.5

4.6

4.7


EUR/RON (eop)



4.0

4.5

5.0

5.5

6.0

6.5

7.0


.

RON yield curve (%)


Forecast



Key rate 5.25 5.25 5.25 5.25 5.00

Consensus 5.25 5.25 5.25 5.13

1 month2 4.70 4.20 4.50 4.30 4.30

3 month2 4.73 4.50 4.60 4.50 4.40

6 month2 4.78 4.35 4.45 4.35 4.25


Yield forecasts


2y T-bond2 5.11 4.92 5.12 5.05 4.95


5y T-bond2 5.42 5.25 5.35 5.25 5.15

10y T-bond2 5.73 5.40 5.50 5.40 5.30




EUR/RON 4.42 4.45 4.50 4.45 4.45

Cons. 4.44 4.49 4.47 4.44

USD/RON 3.42 3.30 3.38 3.30 3.30


Financial Market OutlookThe leu started the year on the right foot, driven by non-residents’ appetite for RON T-bonds after JP Morgan announced the inclusion of Romania in GBI-EM. This move boosted foreigners’ interest in RON T-bonds, and their exposure in-creased to around 19% of total RON outstanding at the end of January from 6% at the end of November (around EUR 3 bn in net acquisitions in Dec–Feb). This al-lowed public debt managers to cover about 33% of RON funding needs and half of the 2013 plan from the external markets (in mid-February Romania tapped USD 1.5 bn, issuing a 2023 Eurobond). While another debt issue on external markets is considered in the second part of the year, we expect actual issuance to exceed the plan of EUR 2.5 bn for 2013. All of this bodes well for the leu. Im-provement in EU funds absorption may also be seen, given that the risks of losing money are expected to push authorities to make more efforts in this regard. Still, net foreign capital inflows to the private sector (FDIs, loans) are likely to remain low. Accordingly, our baseline scenario paints a relatively stable RON over a one-year horizon with a slight depreciation episode in Q3, given the uncertainty about a new deal with the IMF. Prolonged discussions about a new arrangement with the IMF are likely to have a negative temporary impact on the RON markets.

In December and January strong demand from foreigners pushed yields lower in spite of Ministry of Finance tapping hefty amounts. After enhancing the liquidity buffer, public debt managers changed their approach and limited the supply of paper. This fuelled the downside move in yields. Yields could drift lower in Q2, especially for T-bills, as we expect Ministry of Finance to tap the planned amounts and the NBR to ease liquidity conditions. On the other hand, we see the downside potential for T-bonds yields as limited. First, yields are already close to key rate level of 5.25% and any decrease below this threshold is likely to be only temporary. Second, the estimated large amount of instruments bought by non-res-idents hints that the most part of the buying has already taken place. Moreover, we believe a very consistent decrease in T-bonds yields might occur only in the case of securing a new agreement with IMF, an upgrade of Romania’s rating by S&P or a cut in the key rate. Given historical frequent reversals of liquidity condi-tions and uncertainty about a new deal with the IMF (the old one was extended by three months until June 2013) we incorporate a risk premium in Q3. Although it is a close call, we expect the central bank to leave the key rate unchanged this year, despite increased factors supporting a cut (weak economic conditions, waning political risks, lower inflation). However, discussions about a cut should not take place until the autumn when the inflation rate is likely to descend towards 4% and we will have more clarity about a possible IMF programme.

Ana-Maria Morarescu

26 2nd quarter 2013

Political uncertainty dampens economic recovery

Bulgaria

131415161718192021-4

-3-2-101234

2008

2009

2010

2011

2012

2013

e

2014

f


Real GDP (% yoy)




Forecast

Forecast

-20-15-10-505101520

-8-6-4-202468

2008

2009

2010

2011

2012

2013

e

2014

f



2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 6.2 -5.5 0.4 1.8 0.8 0.5 2.5







General budget balance (% of GDP) 2.9 -0.9 -4.0 -2.1 -0.5 -2.1 -1.7


Current account balance (% of GDP) -23.1 -8.9 -1.5 0.3 -0.7 -1.6 -2.3



EUR/BGN (avg) 1.96 1.96 1.96 1.96 1.96 1.96 1.96

USD/BGN (avg) 1.33 1.40 1.47 1.41 1.52 1.46 1.47

Source: Thomson Reuters, wiiw, Raiffeisen RESEARCH

In Q4 2012 economic growth decelerated to 0.3% yoy from 0.9% yoy in the first nine months of the year. Thus the annual figure was 0.8%, falling short of the expectations. The slowdown resulted from weaker EU demand for Bulgarian goods and services, in line with the slack economic conditions. As the external environment is projected to remain lacklustre in 2013, export growth will likely stay in negative territory. However, the observed expansion of sales of goods to non-EU countries, which was visible at the end of 2012, is forecast to continue and thus limit the decline in total exports to 0.4%. The trade balance is expected to deteriorate and the current account deficit is forecast to grow to 1.6% of GDP. Meanwhile, similarly to 2012, domestic demand is projected to be the main driver behind economic growth. However, due to the uncertain external and domestic environment, both households and firms are expected to be cautious. Therefore, consumption and investment dynamics are forecast to decelerate, post-ing growth rates of 1.1% and 2.5%, respectively. As a result, GDP is expected to expand at a modest rate of 0.5%. Against this backdrop, the unemployment rate will continue rising, from 12.3% in 2012 to 12.5% in 2013. No inflationary pressures are expected: annual average inflation is forecast close to the 2012 figure at 3.1% for 2013.Budget execution turned out better than planned in 2012: the fiscal deficit came in at 0.5% of GDP. The improvement in the balance was achieved primarily through prudent expenditure management and to some extent by revenue-boost-ing measures. A higher budget deficit of 2.1% of GDP is projected in 2013, as elections are coming up in May. The latter is also supported by the fact that political uncertainty has increased: the two leading parties seem to have equal chances of winning most of the votes, but still neither of them is likely to secure a majority. The current caretaker government could thus face a second round of parliamentary elections later in the year.

Kaloyan Ganev

Economic growth decelerated due to weaker EU demand Domestic demand as main driver of growth but weak Improved budget balance due to strict austerity measures Early parliamentary elections in Bulgaria are scheduled for 12 May

272nd quarter 2013

Searching for new investors

Serbia

Government keen on obtaining a date for starting accession talks with EU, as rumours of early parliamentary elections spread Another successful Eurobond issue, with dinar strengthening underpinned by strong risk appetite for dinar debt NBS signals monetary policy easing once CPI peaks Talks with the IMF over a new precautionary loan deal in May

0816243240485664-8

-7-6-5-4-3-2-10

2008

2009

2010

2011

2012

2013

e

2014

f


Real GDP (% yoy)




Forecast

Forecast

-14-12-10-8-6-4-2024

-5-4-3-2-101234

2008

2009

2010

2011

2012

2013

e

2014

f



2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 3.8 -3.5 1.0 1.6 -1.9 1.0 2.0







General budget balance (% of GDP) -2.6 -4.3 -4.8 -4.5 -5,7 -4.5 -4.0





EUR/RSD (avg) 81.48 93.94 102.95 101.97 113.04 113.87 114.75

USD/RSD (avg) 55.40 67.38 77.61 73.26 87.93 84.98 86.28


Early 2013 started energetically with the announcement of a new package of support measures for the economy (IT sector support, construction industry) along with the existing government subsidy package for SMEs. Furthermore, a new reindustrialisation plan will be launched soon, which envisages providing sup-port to the IT sector as the core industry along with the automotive, food, and defence industries, the last three industries being in the UAE investors’ limelight. Along with the ongoing EU accession programme, the government is negotiating with the Azerbaijani and Angolan governments on potential investments. All of this might support RSD in the mid-term. Although the risk appetite for dinar debt should ensure a stable EUR/RSD exchange rate in the short-term, temporary volatilities triggered by carry traders and monetary policy easing could result in a slightly weaker dinar. The NBS left the key policy rate unchanged at 11.75% in March, for the first time since the rate hike cycle started in June 2012, signalling the start of monetary policy easing as inflation rates began to fall.The new government strategy to replace the costly London club of creditor’s debt with newly placed debt on the international markets resulted in public debt ac-cumulation of approximately EUR 2.9 bn in the period from September 2012 to February 2013. While hedging the interest rate risk, this strategy poses a FX risk given that all three Eurobond placements from September 2012 to Feb-ruary 2013 (USD 3.25 bn) are USD denominated while capital flows in the country are euro denominated. At the same time, a repeat performance of the government’s approach of providing financial assistance to troubled companies (initially the state-owned banks) and now public enterprises (recently steel pro-ducer “Zelezara Smederevo”) and the announcements of some new supporting measures for the corporates, might endanger the planned improvement in both fiscal ratios. The May IMF visit will have some comments on the fiscal package impact on the Q1 2013 data.

Ljiljana Grubic

28 2nd quarter 2013

20

24

28

32

36

40

44-6

-5

-4

-3

-2

-1

0

2008

2009

2010

2011

2012

2013

e

2014

f


Real GDP (% yoy)




Forecast

Forecast

-6

-4

-2

0

2

4

6

8

2008

2009

2010

2011

2012

2013

e

2014

f



2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 5.6 -2.8 0.7 1.0 -1.3 0.5 2.0





Consumer prices (avg, % yoy) 7.4 -0.4 2.1 3.7 2.1 2.0 2.1







EUR/BAM (avg) 1.96 1.96 1.96 1.96 1.96 1.96 1.96

USD/BAM (avg) 1.33 1.40 1.47 1.41 1.52 1.46 1.47


After a renewed recession in 2012 with real GDP contracting by 1.3%, the first economic indicators for 2013 have shown some initial signs of economic stabilisation. Moreover, during the first month of 2013 the key drivers of the mild economic recovery from 2010 to 2011 – namely exports of goods and industrial production – expanded by 2% yoy and 8.4% yoy, respectively. This was the first positive reading for domestic industrial production after 12 months of continuous decline. However, despite these fledgling signs of stabilisation it is still premature to declare that the economic outlook for 2013 is substantially brighter, based only on these temporary base-effect rebounds. Once again B&H’s economic per-formance will mostly be dependent on the external side of the economy in 2013, borne by economic improvement in the Eurozone, while the continuing domestic political crisis puts negative pressure on domestic demand: private and public consumption and investments are thus not expected to contribute to positive eco-nomic growth. Hence, in our baseline scenario we expect to see stabilisation of the B&H economy in H1, followed by growth driven by net exports in H2. Despite the fragile political stability expected in 2013, we still remain positive about implementation of the structural and budgetary reforms required by the IMF within the framework of the latest Stand-by Arrangement worth BAM 800 mn. This will lead to stable, sound public finances, resulting in an estimated consolidated budget deficit of -1.5% of GDP in 2013. However, the SBA-driven savings measures will lead to a real decline of 0.5% yoy in public consumption.Hence, our baseline scenario still only calls for an economic recovery mirrored in real GDP growth of 0.5% yoy, which is again reliant solely on the external environment and the export transmission mechanism from a recovery in Eurozone economic activity.

Ivona Zametica

B&H will struggle to emerge from recession

Bosnia and Herzegovina

Gloomy economic outlook with fragile real economic growth of 0.5% yoy Bottoming out and stabilisation of the economy in H1, followed by growth driven by net exports alone in H2 Unemployment to bottom out in 2013 Successful implementation of the SBA with the IMF, resulting in sound public finances

292nd quarter 2013

Elections at the gate

Albania

Weak economic growth determined by weak domestic demand Foreign demand remains driving sector of the economy Parliamentary elections to be held on 23 June Current electoral code does not enforce strong majorities

50

53

56

59

62

65-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

2013

e

2014

f


Real GDP (% yoy)




Forecast

0

2

4

6

8

2008

2009

2010

2011

2012

2013

e

2014

f



2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 7.8 3.3 3.9 3.1 2.0 2.0 3.5

Industrial output (% yoy) 4.5 1.0 2.0 3.0 3.0 3.0 3.0











EUR/ALL (avg) 122.8 132.1 137.8 140.3 139.0 138.5 138.3

USD/ALL (avg) 83.5 94.7 103.9 100.8 108.2 103.4 104.0


The Albanian economy grew more slowly than its potential rate in 2012, in-fluenced mostly by the persistent weakness in the Eurozone, which is mostly reflected in the reluctance in consumption and investments. Foreign demand was the driving sector of the economy in 2012. Previous investments in sectors such as energy, infrastructure and telecommunications have started to kick in, reduc-ing the historical dependence of economic growth on emigrants’ remittances and the construction sector. In 2013 we expect economic growth to hover at around 2% again, determined by the weak domestic demand and the general elections to be held on 23 June. The growth structure is not expected to change: the key factor will continue to be the external sector. During the last year, together with the changes in growth factors, Albania also managed to diversify its main trad-ing partners, decreasing its dependence on traditional partners such as Greece and Italy, and increasing trade volumes with countries such as Germany, Turkey and China.

The general elections are the main event in Albania in 2013. Future EU integra-tion is very much linked to proper conduct of the elections, as one of the recom-mendations still to be fulfilled by Albania to gain EU candidacy status is the conduct of elections in line with European standards. The governing Democratic Party has been in power for the last 8 years and will appeal to the citizens for a new mandate in order to complete the infrastructure projects it started. While the main opposition party, the Socialist Party, will try to focus on the need for change in order to refresh economic development. Both parties have a common final ob-jective which is EU integration. It is expected to be a close race, and in any case whoever wins the elections will not secure the two-thirds majority in parliament which is needed for significant reforms.

Joan Canaj

Forecast

30 2nd quarter 2013

A few lights at the end of the tunnel

Kosovo

Government still the largest investor Several incentives for agricultural activities Northern hinterland expected to be integrated Questionable independence of new central bank governor

0

2

4

6

8

10-25

-20

-15

-10

-5

0

2008

2009

2010

2011

2012

2013

e

2014

f


Real GDP (% yoy)




Forecast

Forecast

012345678

2008

2009

2010

2011

2012

2013

e

2014

f

Real GDP (% yoy)


2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 7.2 3.5 3.2 4.5 3.0 3.0 3.0


Producer prices (avg, % yoy) n.v. 3.8 4.7 6.5 0.8 2.0 2.5

Consumer prices (avg, % yoy) 9.4 -2.4 3.5 7.3 2.2 1.5 2.0







EUR/USD (avg) 1.47 1.39 1.33 1.39 1.29 1.34 1.33


Although it was the country with the region’s highest GDP growth (3%) in two consecutive years, this is no reason to be satisfied with the development. On the contrary, a country so isolated by external forces and trends, but with an economy so small that any major investment project accounts for a consider-able part in its growth should do better. The upside of the situation is a stable financial sector with healthy confidence in banks as reflected by steady deposits, somewhat slower loan growth and some growth in non-performing loans, but still lowest in the region.Foreign direct investments are expected to grow in 2013 due to public invest-ment in infrastructure projects, such as the highway completion towards Serbia and the start of the highway towards Macedonia. The latter is only feasible after a successful privatisation of 75% of state-owned telecom provider, due to fiscal constraints and subsequent conditions set by the International Monetary Fund. The government will tend to push forward the initiation to build a new lignite power plant during 2013, given that all environmental considerations on the table are addressed.There is still no sign of change in the heavy industry, or in the producing sector in general, which continues to play a marginal role behind the trading sector. The European Bank for Reconstruction and Development, USAID and also the govern-ment have initiated several incentives for agricultural activities.The outcomes of the negotiations between Kosovo and Serbia are likely to lead to an integration of the northern hinterland into the Kosovar central government structure, which leads to heavy investments in this region, which has been left aside since the end of the Kosovo conflict. The election of the new Governor of the Central Bank of Kosovo, Bedri Hamza, former Finance Minister, by the parliament has led to sharp reactions in civil society, given his recent political history and the question of independence with regard to the central government.

Fisnik Latifi

312nd quarter 2013

Return of C/A deficit increases funding needs

Belarus

0

2,000

4,000

6,000

8,000

10,000

Mar-11 Nov-11 Jul-12 Mar-13

USD/BYR (eop)

0246810121416-16

-14-12-10

-8-6-4-20

2008

2009

2010

2011

2012

2013

e

2014

f




Current account and FCI inflows

Source: Statistical Committee of the RB, Raiffeisen RESEARCH

Forecast

Forecast


2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 10.2 0.2 7.6 5.3 1.5 3.0 4.0







General budget balance (% of GDP) 1.4 -0.7 -2.6 2.4 0.5 -1.0 0.0





EUR/BYR (avg) 3,142 3,894 3,951 6,900 10,700 12,300 13,700

USD/BYR (avg) 2,136 2,793 2,979 4,975 8,337 9,200 10,300


In 2012 economic growth slowed down to 1.5% yoy vs. 5.5% a year ago. In early 2013, GDP growth accelerated to 4.4% yoy, based on double-digit in-creases in investment and household demand. Also, hikes in administratively reg-ulated prices (transport, energy) speeded up inflation processes. CPI has already risen 4.2% since the beginning of the year, putting the government’s inflation target of 12% yoy in question – a figure close to 20% seems more realistic. In our view, this year’s official target of 8.5% GDP growth is overly ambitious (we ex-pect 3%) and would require strong monetary and/or fiscal stimulus, which is not compatible with macroeconomic stability. The strong household demand is likely unsustainable as well and should fade in 2013, but still remain the key driver of GDP growth. After surpluses in H1 2012, the current account deficit returned in Q3 2012 (owing to the termination of an oil product re-exporting scheme). However, the Central Bank succeeded in maintaining the level of FX reserves at USD 8 bn throughout 2012. The Bank realises that too much or too fast monetary easing may lead to devaluation pressures and it also aims to restrain the subse-quent credit expansion (loan growth is too high at 40% yoy in the corporate and 30% yoy in the retail segment). Since early 2013, BYR has remained broadly stable due to the tighter monetary policy and high interest rates on LCY deposits. However, heavy external debt redemptions in 2013 to 2015 amounting to about USD 10 bn (estimate for 2013 at USD 3 bn) may weigh on the FX market. The government intends to cover the external financing gap in 2013 via a Eurobond placement, potential new loans from Russia, privatisation proceeds and the next EurAsEC tranches. While the authorities will likely avoid much depreciation in the short term, we are rather sceptical that exchange rate stability can be maintained over a medium- and long-term time horizon, given the weak external position of the country and high inflation rates in double-digit territory.

Mariya Keda, Andreas Schwabe

Slowing economic activity in H2 2012 as external environment deteriorates Strong start to 2013 as investment rebounds, but flat output due to weak chemical and oil refining sectors Significant deterioration of the C/A balance in H2 2012, multi-billion C/A deficit expected for 2013 External debt redemptions and C/A deficit once again pose a challenge to BYR stability this year

32 2nd quarter 2013

Russia

56789101112

-8-6-4-20246

2008

2009

2010

2011

2012

2013

e

2014

f


Real GDP (% yoy)




Forecast

-10

-5

0

5

10

2008

2009

2010

2011

2012

2013

e

2014

f



2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 5.2 -7.8 4.5 4.3 3.4 3.0 3.0



Average gross wages (% yoy) 27.2 7.8 12.4 11.5 14.8 8.0 9.0




General budget balance (% of GDP) 4.9 -6.3 -3.5 1.6 0.4 0.4 -1.0


Current account balance (% of GDP) 6.2 4.0 4.7 5.2 4.1 2.7 1.9



EUR/RUB (avg) 36.4 44.1 40.4 40.9 40.0 41.3 41.7

USD/RUB (avg) 24.9 31.7 30.4 29.4 30.8 30.8 31.3


Economic outlookIn late 2012, Russia was finally dragged into the regional slowdown, as key macro indicators (investments, retail sales, real income, lending) showed signs of deterioration. Moreover, industrial production growth turned negative in January to February 2013 for the first time since 2009. Thus, GDP growth in Q1 may have fallen even lower than the 2% growth rate estimated for Q4 2012. On a three-month horizon, we are mostly concerned about household consumption given high inflation, limited potential for real wages growth and anticipated weaker lending activity. Economic underperformance should be a strong argu-ment in favour of monetary policy easing. However, headline inflation climbed to an annual peak of 7.3% in February (vs. 6.6% by end-2012) and is expected to remain around 7% until the summer. CPI exceeding the inflation target of 5% to 6% by more than 1 pp has so far been an obstacle to loose monetary stance. However, the slowdown in growth and the appointment of former Economy Min-ister and Putin advisor E. Nabiullina as the new head of the CBR (from June 2013) increases the probability of rate cuts by 50bp in Q2. The federal budget in 2012 was virtually balanced, which is considerably better than the initially forecasted deficit of 1.5% of GDP. The favourable oil price level also allowed rebuilding the sovereign wealth funds, adding USD 20 bn in early 2013. As a result, the total amount of accumulated funds increased to USD 175.4 bn or 7.9% of GDP, which is a good buffer for possible shocks. Prudent fiscal policy with respect to the new fiscal rule could become a challenge in 2013 given the forecasted non-oil budget revenue shortfall and the possibility of social spending increases.In March, President Vladimir Putin has been one year into his third term as Presi-dent. His popularity is still high (45% of Russians trust him the most among all politicians) and he is without any serious contender. While the “systemic” par-

Economy turns to a slower growth path

Economic growth slows, increasing the probability of monetary policy easing Fiscal tightening as a challenge, due to possible non-oil revenue shortfalls Rouble outlook stable in Q2, negative bias towards year-end Upward pressure on OFZ yields continues, we recommend switching to BBB-rated corporates

Forecast

332nd quarter 2013

5.5

6.0

6.5

7.0

7.5

8.0


27

28

29

30

31

32

33

34


USD/RUB (eop)



RUB yield curve (%)


Russia



Key rate 8.25 7.75 7.75 7.75 7.75

Consensus 8.13 7.88 7.88 7.88

1 month2 6.46 6.00 6.50 7.00 6.60

3 month2 7.07 6.60 7.00 7.20 7.25


Yield forecasts


2y T-bond2 6.03 6.00 5.80 5.80 5.80


5y T-bond2 6.26 6.55 6.65 6.40 6.40

10y T-bond2 7.12 7.30 6.90 6.60 6.60




EUR/RUB 39.90 40.9 41.1 42.0 41.6

Cons. 40.8 40.9 40.2 40.5

USD/RUB 30.92 30.3 30.9 31.1 30.8

Cons. 31.1 31.4 31.3 31.4RUB basket 34.96 35.1 35.5 36.0 35.7


Forecast

ties lack any new faces, the “non-systemic” opposition failed to unify in terms of leadership and common goals, once again sliding into obscurity (but also suffering from an increasingly harsh grip by the authorities). Nevertheless, Putin’s popularity is lower than in previous years and slower economic growth may add to popular discontent. Moreover, populist demands may clash with other policy goals, eventually slowing down or even reverting necessary reforms (e.g. the planned reduction of funded pensions to avoid increases in retirement age).

Financial market outlookWhile the price of crude oil fell slightly in recent weeks, we still maintain a neutral-to-positive view on oil price developments for the next quarters with aver-age prices above USD 110/barrel (Brent). Although, as we expected, the rouble traded on a stronger note against the dual-currency basket (composed of 55% USD and 45% EUR) in early 2013, we see limited potential for rouble apprecia-tion in the coming months. One reason behind this is the only limited positive impact from OFZ market liberalisation. A downside risk for our scenario could be another round of global risk aversion (e.g. triggered by a new wave of Eurozone uncertainties), also affecting commodity prices and Emerging Markets. After the mini-cycle of rouble appreciation seen in H2 2012, the rouble has demonstrated surprisingly minimal fluctuations within a narrow range of 34.4 to 35.1 vs. bas-ket in Q1, mainly during the interval without the CBR’s interventions. Past a three-month horizon, our fundamental view on the rouble is still broadly balanced with a slightly negative bias. We expect some decline in the current account surplus to be partly offset by a more moderate net capital outflows. Taking into account speculative pressure, we keep our forecast of a slightly weaker rouble towards year-end unchanged.As we expected, the launch of Euroclear settlement in February triggered profit-taking on the OFZ market which together with rouble liquidity deficit in the local banking system resulted in a gradual price correction. The higher-than-expected CPI for February (+7.3% yoy) also contributed to upward pressure on OFZ yields, which have grown by 25bp on average since the start of the year. Given the fact that the return on risk-weighted OFZ (115bp) is lower than the average level of return on RWA (RoRWA) for Russian banks (250bp), we do not rule out further yield increases by 25 to 50bp (that is 10-year OFZ could reach YTM 7.4% in Q2), if negative sentiment on global markets persists. In contrast to OFZ, BBB-rated corporate bonds offer RoRWA at 300bp which is a quite comfortable return for a carry-trade strategy for the local banks. Accordingly, we recommend switching from OFZ to BBB-rated corporates which in our view will outperform OFZ in terms of total return.

Maria Pomelnikova, Andreas Schwabe

34 2nd quarter 2013

-25-20-15-10

-505

1015

2008

2009

2010

2011

2012

2013

e

2014

f


15

20

25

30

35

40-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

2013

e

2014

f


Real GDP (% yoy)

Source: State Statistics Committee of Ukraine, Raiffeisen RESEARCH

Will investors’ appetite for Ukraine debt last?


Source: National Bank of Ukraine, Raiffeisen RESEARCH

Forecast

Forecast


2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 2.3 -14.8 4.2 5.2 0.2 1.0 3.0

Industrial output (% yoy) -5.2 -21.9 11.2 7.6 -1.8 2.0 4.5



Producer prices (avg, % yoy) 35.5 6.6 20.9 19.0 3.6 -0.6 8.0


Consumer prices (eop, % yoy) 22.3 12.3 9.1 4.6 -0.2 6.0 8.0






EUR/UAH (avg) 7.7 11.2 10.5 11.1 10.4 11.4 12.2

USD/UAH (avg) 5.26 8.0 8.0 8.0 8.0 8.5 9.2


Economic outlookThe GDP growth rate plunged from 5.2% yoy in 2011 to 0.2% in 2012, due to an unfavourable combination of both domestic and external factors. In par-ticular, the recession in the Eurozone and the growth slowdown in EM countries dampened the performance of export-oriented industries, such as metallurgy and machine building. Domestic factors, such as the less bountiful harvest, frozen lending activity, and the fading effects of EURO-2012 preparations also contrib-uted to the deteriorating growth figures. On the other hand, private consumption – boosted by a pre-election spending hike – emerged as the main driving force for growth last year, with an increase of 11.7% yoy. However, this is about to change this year, given the deteriorating public finances, as the general govern-ment deficit expanded to 5.5% of GDP in 2012, from 4.3% in 2011. Conse-quently, economic stagnation is likely to continue in 2013, with GDP growth not exceeding 1.0%-1.5% yoy. The abnormally low inflation last year (-0.2% yoy at end-of-period) was explained by plunging food prices and frozen administrative tariffs. Inflation should accelerate only moderately in 2013 (to 5% Dec-Dec) as no substantial increases in tariffs are expected. The high C/A deficit, dwindling FX reserves, and large-scale external debt repayments suggest an inevitable ad-justment, coupled with IMF reengagement. However, given the improved access to the markets, the authorities might still try to postpone the implementation of painful measures.

Political pressure on the incumbent administration is rising both domestically and externally. The establishment is facing a severe decline in popularity amidst a deteriorating economic situation, thriving corruption and increasing signs of po-litical repression. At the same time, the opposition currently looks stronger and more united than expected. Finally, external relations are souring due to the fad-

Economy fell into recession in H2 2012, outlook calls for near stagnation in 2013 While seeking help from both the IMF and Russia, Ukraine may choose to keep “muddling through” Maintaining the currency peg depends on continued appetite for Ukrainian debt Politics focusing on the 2015 presidential election, low willingness for unpopular reforms

Ukraine

352nd quarter 2013

7.7

7.9

8.1

8.3

8.5

8.7

8.9


USD/UAH (eop)

0.0

10.0

20.0

30.0

2008

2009

2010

2011

2012

2013

e

Unemployment rate (avg, %)Consumer prices (avg, % yoy)

0

2

4

6

8

10-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

2013

e

2014

f


Exchange rate forecast


Inflation outlook


Source: State Statistics Committee of Ukraine, Raiffeisen RESEARCH

Source: National Bank of Ukraine, Raiffeisen RESEARCH

Forecast

Forecast

Ukraine



EUR/UAH 10.50 11.2 11.6 12.2 12.3

Cons. 11.5 11.7 11.5 11.9

USD/UAH 8.14 8.3 8.7 9.0 9.2


ing prospects for European integration (we do not expect the signing of free-trade and association agreements with the EU this year) and the increasingly hostile stance adopted by Russian authorities towards Ukrainian officials. With the ap-proach of the presidential elections scheduled for early 2015 domestic political quarrels are likely to intensify further, possibly posing material risks to economic stability.

Financial markets outlookThe currency peg to USD has survived so far thanks to supporting internal and external factors. Internally, authorities were strongly committed to keep the peg at all costs, i.e. accepting a 20% loss of FX reserves, a tightened monetary policy strangling banking sector growth and the introduction of administrative restric-tions. Externally, access to international bond markets despite weak economic fundamentals and the absence of an IMF deal proved to be crucial. Interna-tional investors were attracted by the high yields of Ukrainian Eurobonds. While Ukraine entered negotiations with the IMF in January, the approach of “muddling through” has continued so far. Successful sovereign FX debt placements helped cover repayments on previous IMF loans. Also, depreciation expectations seem relatively contained for the time being. Fundamentally though, UAH is still highly vulnerable given the high current account deficit and the steep debt redemption schedule. Initially, we expected 2013 to be a window of opportunity in terms of institutional reform, including progress in FX rate liberalisation. Having arrived in 2013, the administration is now already looking ahead to the presidential elec-tions in 2015 and shying away from any unpopular reforms. Thus, we expect our FX forecast of an easing of the peg and depreciation by around 10% by year-end only to be realised in the case of deteriorated access to international bond markets. This would likely force Ukraine into an IMF agreement, which would demand comprehensive prior actions before providing sizeable external funding to the country. However, ongoing negotiations with Russia on cheaper gas (discount of USD 3-4 bn/year) are another wildcard in the game. With the key variable being the external environment, we currently assess the chances of a renewed IMF agreement – and such changes to the FX regime this year – at around 50%.

FX market stabilisation had a unanimously positive effect on money market de-velopments. The excess liquidity cushion of banks has shrunk amidst a pick-up in lending activity, while liquidity remains at a comfortable level as suggested by the persistently low money market rates. The banks have started to cut UAH deposit rates rather aggressively: average 1-year term deposit rate has dropped nearly 150bp since the beginning of the year (to 18%). We expect the 1-year av-erage rate to fall further by 300 to 400bp in the next 3 to 4 months, which means that average lending rates (for first-class corporates) might fall below 20%, a level last seen in mid-2011. Fading depreciation pressures in early 2013 pushed UAH bond yields down (9-month bonds are now quoted at 9%). However, given the looming macroeconomic uncertainty and bleak currency prospects, we do not see this as a sustainable trend in the longer run. Local demand for govern-ment bonds is constrained by the lack of long-term institutional investors, while foreign players might return to the market only after exchange rate adjustment.

Dmytro Sologub, Andreas Schwabe

36 2nd quarter 2013

Turkey

-12

-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012

2013

e

2014

f

General budget balance (% of GDP)Current account balance (% of GDP)

-12-8-4048

1216

2008

2009

2010

2011

2012

2013

e

2014

f


Economic outlook2012 was characterised by a successful soft landing, and a solid acceleration of GDP growth is expected in 2013. The composition of the 1.6% yoy growth rate for Q3 was similar to that observed in the previous two quarters: For the fourth quarter in a row – albeit to a lesser extent – net exports contributed the most to the headline number (+3.4 pp), while domestic demand subtracted 1.8 pp from overall economic expansion. Furthermore, private investments surprised on the negative side again, slumping by 11.2% following the severe 7.4% yoy decline seen in Q2 2012. In essence, the rebalancing between external and internal demand may have peaked as the accommodative potential of exports has ap-parently reached its structural limits. However, we feel that the policy-induced soft landing is comforting, even if it comes at the expense of economic growth.

We expect the second biggest economy in the Emerging Europe region (sur-passed only by Russia) to ramp up in the following quarters and grow in a more balanced way. First, the expected improvement in external conditions should help. Secondly, domestic demand – still accounting for a two-thirds share of GDP – should take the front seat again, supported by dynamic loan growth. With regards to the latter, we assume that the Turkish authorities will stick to their macroprudential framework in terms of avoiding excessive credit growth. On balance, GDP growth should level off between 4% to 5% in 2013 to 2014 fol-lowing a rate of around 3% in 2012. In the quarters ahead, however, the priority should continue to be the further reduction of imbalances and elimination of the boom-bust disposition of the Turkish economy. This is where the low savings rate, which has fallen from some 25% of GDP in the late 1990s to around 14% cur-rently (CEE average: 22% of GDP), comes into the limelight. Only an increase in domestic savings is capable of mitigating the sharp pro-cyclicality of investment depending on the availability of external financing.

Forecast

Forecast


2008 2009 2010 2011 2012 2013e 2014f


Real GDP (% yoy) 0.7 -4.8 9.2 8.5 3.0 4.0 4.5

Industrial output (% yoy) -0.6 -9.9 13.1 8.0 3.0 5.0 5.0











EUR/TRY (avg) 1.92 2.17 2.00 2.34 2.31 2.39 2.34

USD/TRY (avg) 1.31 1.55 1.51 1.68 1.80 1.78 1.76

Source: Thomson Reuters, wiiw, Raiffeisen RESEARCH

External and internal rebalancing successful within the structural limitations Solid GDP growth acceleration in coming quarters, with domestic demand taking the lead again We still favour the long end of the LCY yield curve assuming that Moody’s gives Turkey the investment grade palm in H2 TRY stability to prevail, due to positive track record of central bank in defending the local currency


Real GDP (% yoy)


Budget and current account balance

More rebalancing needed

372nd quarter 2013

1.4

1.5

1.6

1.7

1.8

1.9

2.0


USD/TRY (eop)Source: Bloomberg, Raiffeisen RESEARCH


5.0

5.5

6.0

6.5

7.0

7.5


.


TRY yield curve (%)

Turkey

Forecast



Key rate 5.50 5.25 5.25 5.25 5.25

Consensus 5.50 5.38 5.50 5.63

1 month2 5.52 5.70 5.70 5.70 5.70

3 month2 5.60 5.90 6.00 6.00 6.00

6 month2 5.90 6.70 6.80 6.80 6.60

12 month2 6.15 6.90 7.00 7.00 6.901 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Yield forecasts


2y T-bond2 6.02 6.00 6.10 6.10 5.90

Cons. 6.17 6.21 6.54 6.69

5y T-bond2 6.51 6.20 6.30 6.30 6.00

10y T-bond2 7.03 6.60 6.60 6.60 6.20




EUR/TRY 2.35 2.29 2.39 2.43 2.36

Cons. 2.35 2.32 2.31 2.30

USD/TRY 1.82 1.75 1.80 1.80 1.75


Financial market outlookFollowing the better-than-expected finish to 2012, we believe this year’s inflation outlook to be more challenging than forecast by the Turkish central bank (TCMB). Therefore, end-2013 inflation is likely to be higher than the inflation expectations (6.1%) and the official TCMB target (5%). Since unfavourable one-off effects from 2011 have dropped out of the calculations, possible second-round effects of tax hikes as well as resurgent demand-side pressures in line with our macro scenario should moderately revive price pressures. Therefore we expect average and year-end CPI inflation to come in at around 7% in 2013 following the 4.3 pp drop in the 2012 year-end level versus 2011. The biggest uncertainties, how-ever, remain because price developments in Turkey are largely a function of oil prices and are therefore beyond the control of monetary policymakers. However, our baseline scenario foresees only moderate upward pressure on the price of oil in the next few quarters. As inflation currently seems to be less of a concern for the central bank, the bank will try to utilise its multiple policy tools to reign in credit growth; otherwise it will be hard to maintain last year’s rebalancing efforts.

Whilst the impressive rebalancing on the internal (CPI) and external (internal versus external demand) front brought down the current account deficit by almost 4 pp in the course of 2012, vulnerabilities remain. In particular, the financing quality of the C/A deficit is still poor: only about 1/3 is covered by FDIs and this justifies concerns. Although Moody’s did not specify what C/A deficit level would be sufficient to meet their conditions, the agency clearly said that it would consider other factors that could pave the way for an investment grade (IG) rating despite the stubbornly high (structurally related) level of the C/A deficit. As such, financing of the C/A shortfall has been mentioned. We expect that the government’s efforts to enhance FDI and domestic savings (through the new private pension scheme) could boost the contribution of more stable C/A deficit financing items already during the course of this year. Therefore Moody’s should follow Fitch’s suit and upgrade Turkey to IG in H2 2013. Until then, however, room for continued spread compression on the local currency bond (LCY) mar-ket which characterised the previous periods is likely to be limited. If we prove right and the second IG upgrade comes in H2, another moderate boost for the local debt market is in the cards with the longer end of the curve outperforming the short one. Basically, a falling risk premium would bring moderate gains for Turkish LCY debt, since monetary policy easing should have come to an end. Ad-ditional performance gains from the FX side, however, should not be expected as we anticipate that the lira will remain well managed around the current levels of around USD/TRY 1.80.

Stephan Imre

38 2nd quarter 2013

Sovereign Eurobonds

Market commentEurobond market performance in Q1 could be described as lacklustre. First of all, contingent risks from the Eurozone and the latest crisis escalation in Cyprus dealt a fairly sizable blow to overall market sentiment. Lax monetary policy and low interest rates in the core EU and USA markets were only able to prop up the market to a limited extent, as investors became more risk averse during the last quarter. The macroeconomic background and the credit outlook for CEE sovereigns suffered due to multiple rating and rating outlook revisions. As we ex-pected, the downgrade of Hungary and Croatia resulted in renewed pressure on the average CEE rating score. Overall, market results were broadly in line with our expectations. The European segment in the EUR EMBIG indices recorded a minor 1% increase, whereas the US dollar EMBIG segment lost nearly 2% dur-ing Q1. Incidentally, the major loss-making impact came from the more stable USD segment, in part because overseas investors also reassessed the impact of Eurozone risk on CEE. Among the CEE sovereigns there were very few winners. Unexpectedly, Ukraine Eurobonds outperformed the broader European segment partly due to the rally triggered by Ukraine’s return to IMF negotiations. Our recommendation on Poland also did better than the general market. However, in the USD segment only Ukraine and Bulgaria managed to stay in positive territory price performance wise.

Primary marketSovereign issuance activity also slowed in CEE, as could be seen from primary market results in Q1. The overall volume of sovereign placements from CEE in this period reached just the equivalent of EUR 9.6 bn, compared to nearly USD 21 bn in Q1 2012. A larger number of CEE sovereigns opted to issue in the US dollar market, taking advantage of easier borrowing and liquidity conditions. USD accounted for nearly of 64% of all sovereign placements whereas only Slovakia, Lithuania and Poland issued in EUR. At the same time, we saw Turkey place only a single USD issue whereas this sovereign normally is pretty active during Q1 and used to place at least two separate issues. Also, among the dis-appointments was Russia’s decision to cancel its mega-jumbo issue in January due to less favourable market conditions. Going forward, we do not see much of a change in CEE primary markets as possible risks from the Eurozone coupled with rating pressure on CEE might limit appetite for new issues. That said, we expect issuers such as Turkey to step up with primary placements while there is still a chance that Russia might return to the market, too. Of frequent issuers, we expect Hungary to place more bonds in Q2 since this sovereign is becoming more reliant on international market borrowing in the absence of an IMF loan. Meanwhile, new placements might also originate from Poland and, perhaps, the Czech Republic. Nevertheless, our projections for Q2 very much depend on the market situation which at the time being is not very conducive for achieving the best pricing conditions.

No rally, but muddling through

EMBIG USD returns*

USD segment

Return (%) Spread (bp)

last Q yoy actualComposite -2.26 10.11 298

Europe (CEE) -1.93 12.82 249

Serbia (BB-) 3.86 21.03 564

Ukraine (B) 0.32 5.93 95

Turkey (BB) -0.69 10.96 415

Russia (BBB) -1.22 10.27 129

Hungary (BB) -2.31 10.06 198

Poland (A-) -2.66 17.93 393

Bulgaria (BBB) -3.64 14.01 217

Other segments

Asia -2.48 8.29 193

Africa -1.71 10.41 301

Latin America -2.63 9.20 355

*21-Mar 5:00 p.m. (CET) sorted by last Q performanceNet return not annualised in %, S&P rating in bracketsSource: JP Morgan, S&P, Raiffeisen RESEARCH

EMBIG EUR returns*

EUR segment

Return (%) Spread (bp)

last Q yoy actualComposite 1.07 12.96 195

Europe (CEE) 1.08 14.03 192

Ukraine (B) 3.17 18.15 523

Romania (BB+) 1.74 14.12 121

Hungary (BB) 1.00 10.63 319

Turkey (BB) 0.82 19.63 455

Lithuania (BBB) 0.70 10.64 306

Poland (A-) 0.05 8.95 182

Croatia (BB+) -0.72 11.17 257

Other segments

Asia 0.04 2.96 54

Africa 0.40 5.36 151

Latin America 0.76 8.72 206

*21-Mar 5:00 p.m. (CET) sorted by last Q performanceNet return not annualised in %, S&P rating in bracketsSource: JP Morgan, S&P, Raiffeisen RESEARCH

Weaker results in Q1 likely to continue in Q2 Primary market activity slows down from 2012 Market performance capped by rating pressure and weaker output Stronger fundamentals and stable ratings back in fashion with investors

392nd quarter 2013

EMBIG forecast and performance

Spread Range Spread Range Spread Range

Dur. 21-Mar1 Jun-13 min. max. Perf. (%) Sep-13 min. max. Perf. (%) Dec-13 min. max. Perf. (%)

Poland (A-) EUR 6.0 121 110 100 120 -0.84 80 70 90 -0.25 95 85 105 -3.52USD 5.6 129 100 90 110 0.78 70 60 80 2.45 90 80 100 -0.17

Lithuania (BBB) EUR 3.2 182 160 144 176 -0.12 130 114 146 0.21 150 134 166 -1.72Hungary (BB) EUR 3.5 455 460 435 485 -1.07 430 405 455 -0.71 400 375 425 -1.07Russia (BBB) USD 6.2 198 180 165 195 0.19 150 135 165 2.04 170 155 185 -0.86Croatia (BB+) EUR 2.7 319 330 308 352 -1.01 300 278 322 -0.73 330 308 352 -2.64Romania (BB+) EUR 4.0 306 290 274 306 -0.38 260 244 276 0.03 280 264 296 -2.39

USD 7.2 388 390 374 406 -1.58 360 344 376 0.59 350 334 366 -1.58Serbia (BB-) USD 6.3 415 420 399 441 -1.25 390 369 411 0.63 380 359 401 -0.44Turkey (BB) EUR 4.2 257 220 201 239 0.49 190 171 209 0.91 160 141 179 0.49

USD 8.0 217 200 184 216 -0.25 170 154 186 2.14 155 139 171 0.15Ukraine (B) EUR 2.5 523 500 471 529 -0.07 470 441 498 0.19 500 471 529 -1.57

USD 3.8 564 520 494 546 1.12 490 464 516 2.27 540 514 566 -0.691 closing prices 5:00 p.m. (CET); Performance as cumulative return of gross prices up to forecast horizonSource: JP Morgan, S&P, Raiffeisen RESEARCH

0

1

2

3

4

08-Ja

n

08-Ja

n

28-Ja

n

12-F

eb

14-F

eb

14-F

eb

20-F

eb

18-M

ar

TR PL LT HU RS RO SK SK

USD bn

CEE primary market by sovereign*

*in Q1’13, USD equivalent for non-USD placementsSource: Bond Radar, Bloomberg, Raiffeisen RESEARCH

020406080

100120140160180200

2007

2008

2009

2010

2011

2012

2013

*

Sov Agency Corp FIG

CEE sovereign issuance, 2013*

* Issuance in USD bn, ytdSource: Bloomberg, Raiffeisen RESEARCH

100

200

300

400

500

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13

EMBIG EUR EuropeEMBIG USD Europe

EMBIG EUR Spread (bp), EUR vs. USD

Source: JP Morgan, Raiffeisen RESEARCH

Market outlookWe project that Q2 might turn out to be more difficult because of several fac-tors weighing on overall market performance. First and foremost, the Eurozone financial crisis is not over and the market has been overly optimistic about future prospects. The VIX index measuring the volatility of the S&P 500 is currently near its two-year lows, and the European Stoxx 50 Volatility index is in similar position, reflecting far lower risk perception. Meanwhile, economic prospects for Europe are dim and any recovery could be expected to take place only in H2 2013. Furthermore, rating pressure is high for developed Europe, with the UK recently joining the downgrade group. Similar rating pressure also re-emerged in CEE, with Slovenia and Croatia receiving rating downgrades from S&P this year, while Hungary saw its outlook change from stable to negative once again. The economic slowdown also hit CEE, with most of the countries in the region report-ing abysmal and often more so negative growth rates for industrial sector. Fiscal pressure might also grow on CEE governments in the wake of poorer economic results to relax policies for the sake of propping up spending, while many coun-tries have approached their limits in relaxing monetary policy. Consequently, we find CEE risk-reward returns skewed towards increasing risk, which might under-cut market performance in Q2 and result in negative returns.

Market strategyWe do not see many choices to broaden the CEE portfolio in Q2, so we recom-mend sticking to defensive strategies and focusing on countries with good fun-damentals and stable credit rating profile. We buy&hold Turkey despite its busy external payment profile since its sovereign rating remains watch positive and the country might receive an upgrade from Moody’s in H2, while we feel more comfortable about Turkey’s economic fundamentals. Turkey underperformed the rest of the market in Q1 due to tighter valuations. We also like Russia, which demonstrates some better stability and resilience to the Eurozone crisis. Russia’s outstanding debt metrics also make it a safer bet from a repayment perspective. On a relative value scale, we sell Ukraine to add Hungary. In Ukraine, sudden optimism about IMF talks may disappoint due to limited willingness of the Ukrain-ian government to meet IMF demands. At the same time, the Ukrainian spread looks tight compared to Hungary at a 68bp spread differential.

Gintaras Shlizhyus

Sovereign Eurobonds

40 2nd quarter 2013

Corporate Eurobonds

-5% -2% 1% 4% 7%

EMBIG

CEMBI LATIN

CEMBI

CEMBI RU

CEMBI MIDEAST

CEMBI ASIA

CEMBI KZ

CEMBI UA

Q1 2013 ytd returns

Source: JP Morgan, Raiffeisen RESEARCH

The performance of EM credits has been fragmented in the year-to-date. The global EM corporate bond index posted a minor positive total return (0.6% YTD) and registered virtually flat spread performance (+3bp). In the CIS segment, Rus-sia’s performance was broadly in line with the market, while the search for yield enhancement and credit quality spread compression drove spreads on Ukrain-ian and Kazakh high-yield corporates tighter. These regions gained the most, returning 6.1% and 2.9%, respectively, whereas by contrast, Russian corporates and Kazakh quasi-sovereigns lagged behind at 0.5% and -2.9%, respectively. Two events interrupted the broadly positive sentiment. First, the ambiguous result of the Italian elections failed to reverse the market’s risk-on mode fuelled by the ample liquidity and ended in a mini-rally which erased the losses. Second, the bailout saga in Cyprus is currently weighing on valuations. However, against all odds Russian credits do not seem to be punished visibly more than their EM counterparts so far, despite Russia’s economic links to the Mediterranean island. Spreads on the corporate segment in Russia are about 110bp off their lows from April 2011. However, we believe that such significant spread tightening is unlikely, considering the low Treasury yield environment. All in all, we will be monitoring the effect on the Cyprus saga on portfolio inflows into hard currency EM bonds, which is an essential technical factor.

The first three months of this year featured strong issuance activity in this asset class, as EM corporates raised almost USD 88 bn from the Eurobond market, vir-tually flat compared to the amounts issued in Q4 2012. Last year, Q1 new issu-ance was slightly higher, at USD 92 bn, but this was mainly driven by LatAm and Asia, while this year CIS region issuance was almost on par with the LatAm seg-ment, contributing 20.5% of the global EM issuance versus 22.7% by LatAm. CIS corporate Eurobond issuance in the first quarter-to-date exceeded USD 18 bn, reaching the amounts printed in Q1 of the record year of 2007. Russian issuers contributed the largest portion of the issuance as a number of companies and banks rushed to the favourable markets to satisfy their refinancing and prefund-ing needs. As expected, new high-yield debut issuers (Phosagro, Sibur, Ukrland-farming) tapped the market, and we expect more newcomer borrowers to come if the market remains favourable.

Moreover, many Russian banks were eager to place Tier2 paper in the first quarter, before new regulations by the Central Bank of Russia came into force. Amongst other things, under the new requirements, Tier 2 subordinated debt must contain a loss absorption provision, which requires a conversion of the sub-debt into common equity in the distressed scenario (e.g. if the bank’s Tier 1 capital falls below 2%). These regulations are applicable to newly issued paper (after the introduction on 1 March 2013), while “old” non-qualifying instruments will be grandfathered and phased out from the bank’s capital by 10% a year. Thus, if one holds or plans to invest in the “old” paper, issued before 1 March 2013, we basically see no particular influence from these regulations. As regards the

CIS corporates: in search of value on the primary market

0

50

100

150

200

250

100

200

300

400

500

600

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13Spread CEMBI BROAD RU vs. EMBIGRU (r.h.s.)CEMBI BROAD RU

EMBIG RU

RU: corporate/sovereign spread*

*in bpSource: JP Morgan, Raiffeisen RESEARCH

Ukraine and Kazakhstan outperformed the global EM index, Russia moved in line with the market Russian primary market is booming, Ukraine is rebounding, more new HY paper may follow Kazakh IG-rated papers underperformed Russian peers, idiosyncratic risks mount in the Kazakh banking segment Unless the Cyprus story results in more attractive valuations, we prefer to capture value on the primary market

0%

25%

50%

75%

100%

2007

2008

2009

2010

2011

2012

2013

YTD

Asia CISCEE MidEast & AfricaLatAm

Source: Bond Radar, Raiffeisen RESEARCH

EM corporate issuance

412nd quarter 2013

“new” subordinated papers, we feel that if these are issued they should offer premium compared to “old” ones. Another reason behind the particularly strong Russian borrowings might be renewed speculations about the imposition of with-holding tax on corporate Eurobonds in Russia. We still believe that Russian offi-cials will decide against the imposition of such tax, which may add to borrowing costs for corporates and deter foreign investment from entering the economy. This year, we also saw significant Eurobond amounts issued in roubles, which allowed the issuers to secure tighter premiums against the Russian sovereign OFZ issues, compared to RUB borrowings on the domestic market. That said, in Rus-sia, domestic corporate bonds should become Euroclearable this year following the sovereign OFZs. As things stand, we do not see much impact on the prices of Russian corporate Eurobonds outstanding in light of this potential event.

On the Kazakh primary market, it has been peace and quiet this year. We have only heard that NC KMG was reportedly planning a USD new issue. The country’s IG-rated corporate papers are still not attractive versus their Russian peers, although they have lost somewhat on a relative basis over Q1. We be-lieve the underperformance was mainly attributable to the relative richness of these credits. Also, media reports on a possible inaugural sovereign issue might have provoked some selling activity. In the high-yield banking segment the idi-osyncratic risks mounted after the Kazakh government unveiled its plan to create one centralised state-owned pension fund. The blueprint envisages purchase of the pension fund from Halyk in exchange for the BTA Bank stake and from KKB in exchange for the government stake held by Samruk-Kazyna. In Ukraine, although fundamentals remain constrained, the country’s primary corporate Eurobond market is showing signs of a rebound this year, with three banking and two corporates issued so far. We believe that local credits benefited to some extent thanks to positive headlines on the country’s improved access to the global debt markets. In addition, spreads between Ukrainian corporates and sovereign pa-pers have tightened recently, allowing Ukrainian borrowers to go for somewhat tighter pricing against the sovereign curve.

All in all, as things stand we believe that it is hard to capture value in the IG-rated CIS remit. Our top pick is Gazprom, which again looks somewhat cheaper against peers. We will also be on the lookout for the Rosneft/TNK-BP story, as the debt supply from the former is still on the radar. Although Rosneft has just attracted domestic bonds and a massive Gazprombank loan, we still think the issuer may opt for Eurobonds, probably before the mooted sovereign comeback to the market this year. The high-yield segment also offers less value as a result of further credit quality spread compression and attractive spreads might be mainly captured in cases with high idiosyncratic risks (e.g. Koks group). However, we still see some value in such papers as Alfa Bank 7.875% 2017, Evraz 6.75% 2018 or VimpelCom 7.748% 2021. Our story is not without ”sell” ratings this time, as we have recently changed our long-lasting buy rating on the Halyk Bank 7.25% 2017 paper to sell. We remain wary of the Cyprus story and believe that if it leads to further negative escalation on the market, we will probably get some more interesting CIS credits on our shopping list. Meanwhile, in search for value, we remain focused on the primary market issues, which however not always offer many attractions to investors, as they are issued flat to secondary curves.

Martin Kutny, Alexander Sklemin

6080100120140160180

0100200300400500600

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13Spread CEMBI BROAD RU vs. EMBIGKZ (r.h.s.)CEMBI BROAD RU

EMBIG KZ*in bpQuelle: JP Morgan, Raiffeisen RESEARCH

Russian corporates vs. Kazakh IG*

02004006008001,0001,2001,4001,6001,800-60

-40

-20

0

20

40

Dec-06 Jul-08 Jan-10 Jul-11 Jan-13# upgrades - # downgrades

JP Morgan RUBI (in bp, right axis,reverse order)

Source: Bloomberg, JP Morgan, Raiffeisen RESEARCH

Rating drift in Russia

Selected corporate issues

Issuer ISIN Maturity Yield in %

Alfa Bank XS0544362972 9/25/2017 4.6

Evraz XS0618905219 4/27/2018 5.7

Gazprom XS0885733153 2/6/2020 3.7

Halyk Bank XS0298931287 5/3/2017 5.0

NC KMG XS0556885753 4/9/2021 3.9

VimpelCom XS0587031096 2/2/2021 5.6Source: Bloomberg, Raiffeisen RESEARCH

Corporate Eurobonds

42 2nd quarter 2013

Value matrix*

Domestic business activity 3 (3)

Exports OECD - excl. Eastern Europe

3 (3)

Eastern Europe 3 (3)

Asia 3 (3)

Company earnings 2 (2)

Key sectors 2 (2)

Valuation - P/E-ratio 2 (2)

Interest rates / yields 1 (1)

Exchange rates 2 (2)

Foreign equity markets 1 (2)

European liquidity 1 (1)

Technical outlook 3 (2)1 (4) denotes highly positive (negative) influence on the market. All factors are weighted equally.* expected trend for the next 3 to 6 monthsSource: Raiffeisen RESEARCH, Raiffeisen Centrobank

Equity market/Austria

Sector structure ATX

Sector Company WeightFinancials CA Immobilien, conwert, Erste Group, Immofinanz, Raiffeisen Bank International, Vienna Insurance Group 41.9%

Industrials Andritz, Oesterreichische Post, Strabag, Wienerberger, Zumtobel 17.5%

Energy OMV, Schoeller-Bleckmann 16.6%

Basic materials Mayr-Melnhof, Lenzing, RHI, voestalpine 16.3%

Telecom Telekom Austria 3.7%

Utilities EVN, Verbund 4.0%Source: Raiffeisen RESEARCH, Raiffeisen Centrobank, Vienna Stock Exchange

During the past quarter, the performance of the Austrian equity market was posi-tive on the whole, even though the market lagged behind most of its Western European counterparts. Compared to the equity markets in Eastern Europe, how-ever, the ATX retained the upper hand. While events in Italy also had an impact on the Austrian market, the ATX remained broadly robust. Another interesting aspect is that – with the exception of Andritz and OMV – the index heavyweights have seen disappointing performance since the beginning of the year, making no positive contribution to performance.

At the same time, one must note that the generally good mood on the equity markets does not really match up so well with the economic developments. The economy in Austria continues to exhibit weak dynamics. During the fourth quar-ter, output actually contracted by 0.1%. We also only expect to see stagnation in the first quarter. During the course of the second half of the year, hopes of improvement should be justified, as that is what the leading indicators are point-ing to at least. We expect to see a positive impact from stronger investment and net exports. Thanks to the falling inflation, private consumption should also rise during the year. For the year as a whole, we are still forecasting an expansion

Positive factors prevail

-50%

0%

50%

100%

150%

200%

Mar

ket

Ener

gy

Mat

eria

ls

Indu

stria

ls

Fina

ncia

ls

Util

ities

Euro Stoxx Small Euro Stoxx

Valuation premium of ATX sector

Valuation discount of ATX sector

Relative P/E 2013e ATX

Source: Raiffeisen RESEARCH, Raiffeisen Centrobank, Bloomberg

Sovereign debt crisis also impacting the Austrian equity market Double-digit gains in earnings in 2013 Liquidity continues to be the major driving force

of just 0.5% for the Austrian economy, but this will still be better than the rate of -0.1% projected for the Eurozone as a whole. Nor does it look like there will be a rapid economic recovery in Eastern Europe. Growth in the CEE region (2013f: +2.0%) continues to be bolstered by coun-tries such as Slovakia, Romania and Russia. By contrast, the economies in Hungary, Croatia and the Czech Repub-lic are still contracting. Corporate earnings have not been very dynamic in the recent past. In this regard, one must note that many com-panies took advantage of the opportunity to book one-off effects in the previous reporting season. Most of the corporate data reported, thus, fell short of our expecta-tions. This included companies such as EVN, RHI and the index heavyweight Andritz. On the other hand, positive surprises were announced by Verbund, Telekom Austria and OMV.

432nd quarter 2013

Fair value of ATX1 - March 2014

Bond yields (10y)

EY-BY2 2.00% 2.50% 3.00%

8.25% 2,455 2,341 2,2378.00% 2,517 2,397 2,2887.75% 2,581 2,455 2,3417.50% 2,649 2,517 2,3977.25% 2,721 2,581 2,4557.00% 2,796 2,649 2,5176.75% 2,876 2,721 2,5816.50% 2,961 2,796 2,6496.25% 3,050 2,876 2,7216.00% 3,146 2,961 2,7965.75% 3,247 3,050 2,8765.50% 3,355 3,146 2,9615.25% 3,471 3,247 3,0505.00% 3,595 3,355 3,146

1 based on the expected earnings for 2013/2014 (i.e. 251.7 index points)2 earnings yield less bond yieldSource: Raiffeisen RESEARCH, Raiffeisen Centrobank

Valuation and forecasts


12-months forward earnings 256.2 236.1 242.7 249.4 251.7

Bond yield forecast 1.65 1.85 2.05 2.40 2.50

Earnings yield less bond yield (EY-BY) 8.80 6.75 7.50 7.00 7.00

ATX-forecast based on EY-BY 2745 2542 2653 2649

ATX-forecast 2,452.4 2,560 2,500 2,650 2,630

Expected price change 4.4% 1.9% 8.1% 7.2%

Range 2100-2700 2250-2800 2250-2850 2250-2850

P/E based on 12-month forward earnings 9.6 10.8 10.3 10.6 10.51 11:59 p.m. (CET); Source: Raiffeisen RESEARCH, Raiffeisen Centrobank

Earnings yield* less bond yield

*Earnings yield = E/P; based on 12-month forward earningsSource: Thomson Reuters, Raiffeisen RESEARCH, Raif-feisen Centrobank

0

5

10

15

20

2001 2004 2007 2010 2013Fo

reca

st

Equity market/Austria

As for the guidances, most companies tended to be conservative. As in the past quarters, caution was the dominant theme, due in part to the low visibility. Although economic performance in Austria and Eastern Europe is still sluggish, companies should be able to book higher earnings in 2013. In terms of adjusted earnings, we are looking for growth of almost 30%. However, this is also a result of several one-off effects that were registered during 2012. This means that on aggregate Austrian firms will see much stronger growth than those in Germany, for example. As for valuations, the levels are looking relatively moderate. The P/E ratio for 2013f earnings is currently at 11.6. The ATX still shows lower valuations compared to the DAX index for the cyclically adjusted P/E ratio. In contrast to the years 2006 and 2007, when there was a massive premium in the valuation comparison, it is interesting that a valuation discount of almost 30% has now opened up for this indicator. The persistently low interest rate conditions also mean that dividend payouts are more interesting in Austria as well. While the 3.3% aggregate dividend yield of the ATX companies is not very high in absolute terms, compared to risk-free Austrian or German government bonds the return is hard to ignore.

Although the government debt crisis and its consequences may come into focus at any time again, international equity markets are looking quite robust. This is also broadly true for the Austrian market. The fact that there has not been any new escalation of the situation can probably be chalked up to the intensive efforts of the ECB on the capital markets. Nonetheless, problems in the Eurozone countries will continue to accompany us in the months to come and will cause repeated bouts of uncertainty. Still, we believe that the abundant supply of liquidity to the capital markets will continue to have an effect and will remain the dominant fac-tor. Certainly the valuations of the ATX companies still have room to go higher. Accordingly, we expect to see rises in the ATX index until the end of June, despite the fact that investor sentiment is already very optimistic.

Johannes Mattner

44 2nd quarter 2013

Equity market/CEE

Price performance on the CEE equity markets has been quite varied since the beginning of the year. While the core CE countries such as Poland and the Czech Republic have posted negative figures so far and Russia and Hungary have both essentially been dead in the water, prices were on a roll in Southeastern Europe and Turkey. As a result, we do not think that performance in the second quarter will be completely uniform. In general, the equity markets should profit from the mild improvement in economic conditions in the established regions (USA, Euro-zone), as reflected in the leading indicators, which should have a positive effect on economic performance in the CEE region. During the second half of the year, economic activity should begin to pick up pace again as the recovery strength-ens. In anticipation of this, we are looking forward to positive developments on both the established and the CEE stock markets in Q2 2013. As international risk aversion eases, local topics should also start to become more important. Due to the economic recovery, we tend to prefer a cyclical sector allocation.

Since the beginning of the year, the Russian MICEX index has performed slightly better than comparable growth markets (CE, China, India, Brazil), but is still lagging behind the established markets. Generally speaking, it appears that the days of unhindered positive growth are over. For 2013, aggregate earnings for the MICEX are estimated to grow at a modest rate of just 5.0% (after a decline in earnings of 12.6% in 2012), as the index is hampered by the energy sector (earnings growth 2013e: 0.8%), which accounts for about a 52% weighting in the index. Accordingly, a more differentiated view should be taken, for example since companies from the materials or retail trade sector offer at least double-digit growth in earnings. However, due to its low valuation the heavily-weighted en-ergy sector distorts the 2013e P/E ratio for the MICEX strongly downwards. Fur-thermore, no support is expected to come from the oil price during Q2 (average Brent price in Q2 2013: USD 112) and economic performance has also tapered off slightly recently, leading us to expect modest growth in GDP next quarter, at least judged by Russian standards. The MICEX is also now reacting sensitively to bad news at the international level, whereas positive news is not having a major impact. Accordingly, in a regional comparison we take a more cautious view for the second quarter. HOLD.

Conditions in place for a recovery

Value matrix stock markets

PL HU CZ RU RO HR TR

Politics 2 (2) 4 (4) 2 (2) 2 (2) 2 (3) 2 (3) 2 (2)

Interest rate trends 2 (1) 2 (2) 1 (1) 2 (3) 2 (2) 2 (2) 2 (3)

Earnings outlook 4 (4) 2 (2) 2 (1) 3 (3) 1 (1) 3 (2) 2 (1)

Key sectors 3 (3) 2 (2) 3 (3) 3 (2) 2 (3) 3 (3) 2 (1)

Valuation (P/E) 2 (2) 2 (1) 2 (2) 1 (1) 1 (1) 2 (1) 2 (2)

Liquidity 1 (1) 3 (3) 3 (3) 2 (1) 3 (3) 4 (4) 1 (1)

Technicals 4 (1) 2 (4) 3 (2) 3 (3) 2 (3) 2 (4) 2 (3)1 (4) denotes highly positive (negative) influence on the market. All factors are weighted equally. Assessment refers to a 3-month period. Source: Raiffeisen RESEARCH

50

100

150

200

250

300

350

2009 2010 2011 2012 2013

CROBEXBETISE National 100

SEE indices in comparison

In local currencySource: Bloomberg, Raiffeisen RESEARCH

“Buy” assessment for most markets, thanks to fading risk aversion Local factors gaining importance High liquidity available for equity investments Historically speaking, valuations of CEE stock markets look relatively attractive

30

40

50

60

70

80

90

100

2008 2009 2010 2011 2012 2013BUX WIG20 PX

In local currencySource: Thomson Reuters, Raiffeisen RESEARCH

Region‘s core indices

452nd quarter 2013

Since the beginning of the year, the Polish WIG 20 stock index has mostly suf-fered. Although the absolute rate of economic growth is estimated at +1.2% for 2013e and thus looks quite good by CE standards, Poland is one of the few countries experiencing a negative trend for the year as a whole as GDP growth will be slower this year than it was in 2012. This will have an impact on the ag-gregate earnings estimation for the index, which is quite negative at -15.6% for 2013. Consequently, the 2013e P/E ratio of 12.0 is no longer looking so cheap, but it still appears to be at least moderate. But as the aforementioned factors have now been priced in, the Polish stock market is still interesting in the region, due to its size and liquidity. BUY.

The Czech PX is mainly driven by a few heavyweights (in particular financials with an index weighting of 57%). The defensive companies CEZ and Telefonica CR round off the picture. With a 2013e P/E ratio of 11.1, the valuation can still be seen as moderate and the aggregate earnings growth for the index is estimated at 10.4% for 2013, a quite decent rate. In a CE comparison, this market is actually the leader in dividend yields, which we project at 5.3% for 2013. Even though we have scaled back our expectations for CZK somewhat, the longer-term appreciation trend and the record low interest rate level (0.05%) are still in place. Accordingly, dividend yields look particularly interesting in Czech Republic. In economic terms, the worst now seems to be past and the first

Indices in performance comparison

2004 2005 2006 2007 2008 2009 2010 2011 2012 21-Mar1

ATX 57.4% 50.8% 21.7% 1.1% -61.2% 42.5% 16.4% -34.9% 26.9% 2.1%

BUX 57.2% 41.0% 19.5% 5.6% -53.3% 73.4% 0.5% -20.4% 7.1% 0.4%

WIG 20 24.6% 35.4% 23.7% 5.2% -48.2% 33.5% 14.9% -21.9% 20.4% -7.2%

PX 56.6% 42.7% 7.9% 14.2% -52.7% 30.2% 9.6% -25.6% 14.0% -5.4%

MICEX 6.6% 84.3% 67.5% 11.5% -67.2% 121.1% 23.2% -16.9% 5.2% -1.1%

BET 101.0% 50.9% 22.2% 22.1% -70.5% 61.7% 12.3% -17.7% 18.7% 10.4%

CROBEX 32.1% 26.4% 62.2% 63.2% -67.1% 16.4% 5.3% -17.6% 0.0% 14.5%

ISE National 100 n.a. n.a. -1.7% 42.0% -51.6% 96.6% 24.9% -22.3% 52.6% 5.3%

CECE Composite Index 57.1% 44.7% 14.7% 10.5% -53.7% 40.5% 15.7% -29.1% 25.7% -9.5%

DAX 7.3% 27.1% 22.0% 22.3% -40.4% 23.8% 16.1% -14.7% 29.1% 4.2%

Euro Stoxx 50 6.9% 21.3% 15.1% 6.8% -44.4% 21.1% -5.8% -17.1% 13.8% 1.8%

S&P 500 9.0% 3.0% 13.6% 3.5% -38.5% 23.5% 12.8% 0.0% 13.4% 8.4%

MSCI World 9.5% 13.7% 13.5% 2.8% -40.1% 22.8% 7.8% -7.6% 13.1% 8.7%In local currency1 11:59 p.m. (CET)Source: Bloomberg, Thomson Reuters, Raiffeisen RESEARCH

Stock market indicators

Long-term growth Earnings growth Price/earnings ratio Dividend yield2012 2013e 2014f 2012 2013e 2014f 2013e

ATX 5.8% 14.8% 29.8% 11.9% 14.3 11.0 9.8 3.3%

WIG 20 4.2% -5.2% -15.6% 5.4% 10.1 12.0 11.4 4.9%

BUX 5.7% -16.3% 8.7% 11.1% 9.5 8.8 7.9 4.3%

PX* 6.0% -5.7% 10.4% 5.9% 12.3 11.1 10.5 5.3%

MICEX 5.1% -12.6% 5.0% 3.6% 5.6 5.3 5.2 4.2%

BET 7.1% -12.8% 31.4% 10.0% 8.1 6.1 5.6 5.5%

CROBEX10 4.6% 46.7% 5.6% 5.5% 9.6 9.1 8.6 4.3%

ISE National 100 11.5% 19.0% 10.2% 8.7% 12.6 11.5 10.6 2.2%1 Czech Rep. (PX): excl. Orco PropertySource: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

Expected index performance

Source: Raiffeisen RESEARCH

0%

5%

10%

15%

20%

ATX

WIG

20

BUX PX

MIC

EX BET

CRO

BEX1

0

ISE

Nat

. 100

Jun-13 Mar-14

Equity market/CEE

46 2nd quarter 2013

Equity market/CEE

signs of improvement should be seen in the second quarter. As activity gains momentum in the second half of the year, there will be some minor easing of the restrictive fiscal policy. BUY.

The Hungarian BUX index has at least remained stable since the beginning of the year. Nevertheless, this market still does have some catching up to do from last year, compared to its peers in the Czech Republic and Poland. It is also a fact that companies in Hungary face challenging conditions, as the quarterly results of the index heavyweights tended to be lacklustre, which is often due to the increased tax burdens. In terms of political developments, the government of Viktor Orban was back in the headlines after it passed wide-ranging changes to the Constitution, despite international warnings and internal protest. Valuations are providing some support, however: with a projected 2013e P/E ratio of 8.8, the market looks very good in a CE comparison, and thus there should be some support on the downside. Moreover, despite the difficult conditions, aggregate earnings growth for the index is estimated at 8.7% this year. As the negative fac-tors are now known, we are cautiously optimistic about Q2 2013, but we do not expect any outperformance compared to the region. BUY.

The Turkish leading index, the ISE National 100, maintained its robust uptrend at the turn of the year, before the party mood amongst investors suddenly disap-peared at the end of January, as the rating agency Moody’s did not welcome Turkey to the group of investment grade countries, as had been expected. Never-theless, investors took advantage of this temporary slump to re-enter the market, helping to push the ISE National 100 back near its all-time highs again. We expect to see Turkey upgraded by Moody’s in H2 2013 and believe the Turkish equity market will thus enjoy good support. In light of the fact that the Turkish market is situated in one of the few clearly expanding economies, the market’s 2013e P/E ratio of 11.5 for the index looks quite comfortable. In respect of earnings growth (2013e: +10.2%), we see room for improvement thanks to the expansive economic environment. BUY.

With a gain of 10% since the beginning of the year, the BET index in Bucharest has outperformed all of its Eastern European peers. Investors’ sentiment was not hampered in the least by the fact that the Stand-By Agreement (SBA) with the

Index estimates

21-Mar1 Jun-13 Sep-13 Dec-13 Mar-14 Recommendation

ATX 2452 2560 2500 2650 2630 BUY

Performance 4.4% 2.0% 8.1% 7.3% since 1/1/12

Range 2100-2700 2250-2800 2250-2850 2250-2850 2.1%WIG 20 2396 2500 2450 2600 2650 BUY


Range 2200-2600 2300-2600 2350-2700 2400-2750 -7.2%BUX 18250 19000 18800 19600 19900 BUY


Range 17000-20000 17000-20000 17500-21000 18000-21500 0.4%PX 983 1020 1000 1070 1080 BUY


Range 850-1150 850-1150 900-1200 900-1200 -5.4%In local currency1 11:59 p.m. (CET)Source: Thomson Reuters, Raiffeisen RESEARCH

0

5

10

15

Aus

tria

Pola

nd

Hun

gary

Cze

ch R

ep.*

Russ

ia

Rom

ania

Cro

atia

Turk

ey

2012 2013e 2014f

P/E ratios in comparison

* Czech Rep. (PX): excl. Orco PropertySource: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

-30%

-10%

10%

30%

50%

Aus

tria

Pola

nd

Hun

gary

Cze

ch R

ep.*

Russ

ia

Rom

ania

Cro

atia

Turk

ey

2012 2013e 2014f

Earnings growth

* Czech Rep. (PX): excl. Orco PropertySource: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

472nd quarter 2013

-50

50

150

250

350

Russ

ia*

Turk

ey

Pola

nd

Aus

tria

Hun

gary

Cze

ch R

ep.

Rom

ania

Cro

atia

2012 End of February 2013

0,78

bn

1,03

bn

1,03

bn

1,45

bn

0

40

80

120

160

200

240

Russ

ia*

Turk

ey

Pola

nd

Aus

tria

Cze

ch R

ep.

Rom

ania

Cro

atia

Hun

gary

633.

6

Market capitalisation overview

* Russian data based on MICEX/RTSIn EUR bn; end of November 2012Source: FESE, FEAS, WFE, Raiffeisen RESEARCH

Avg. daily turnover (EUR mn)

* Russia: 2011 MICEX; 2012 MICEX/RTSSource: FESE, FEAS, WFE, Raiffeisen RESEARCH

Index estimates

21-Mar1 Jun-13 Sep-13 Dec-13 Mar-14 Recommendation

MICEX 1459 1500 1480 1580 1620 HOLD


Range 1250-1750 1250-1750 1350-1850 1400-1900 -1.3%BET 5687 6000 5900 6100 6200 BUY


Range 5000-6800 4800-6800 5200-7000 5500-7000 10.4%CROBEX10 1108 1150 1140 1170 1200 BUY


Range 950-1250 900-1250 1000-1300 1050-1350 14.0%ISE Nat. 100 82374 90000 87000 91000 95000 BUY


Range 73000-95000 70000-95000 75000-100000 80000-100000 5.3%In local currency1 11:59 p.m. (CET)Source: Thomson Reuters, Raiffeisen RESEARCH

IMF was tentatively extended until just end-July and that the IMF wishes to see more progress in structural reforms and privatisation for a new agreement to be reached. It is looking more and more certain that Romania is quite able to go it alone in attending to its refinancing needs and that another SBA is not an absolute necessity. As for privatisation, the most progress appears to have been made with the sale of a 15% stake in the gas utility Transgaz, with the govern-ment stating its intention to complete this process as early as the end of April. In particular, the attractive valuation is a factor suggesting that the performance of the Bucharest exchange will continue to be good in the second quarter, in our opinion. For the BET index, the P/E ratio based on estimated earnings for 2013 is a modest 6.1. Thanks to the high dividend ratio mandated by the state (for energy and utility companies), the dividend yield for the Romanian index is 5.5% (2013e), which is the highest in our investment universe and looks quite interest-ing for yield-hungry investors. BUY.

After bringing up the rear last year, the Zagreb stock exchange kicked off 2013 with a burst of catching up. In terms of performance, the gain of 14% registered since the start of the year means that the Croatian CROBEX10 index was the star performer amongst the markets we monitor. We see this market’s performance stemming less from economic factors, as the economic outlook (GDP 2013e: -0.5%) remains gloomy and progress with the necessary comprehensive struc-tural reforms (labour market, pension system) is slow. The reason for the strong performance is Croatia’s imminent accession of the European Union. When the last major round of EU enlargement took place in 2004, disproportionately strong gains were seen on the involved markets back then, thanks to EU acces-sion and investors’ expectations that the convergence process would accelerate. With this in mind, we expect to see an increase in capital inflows from abroad and a positive performance by the CROBEX10 during Q2 2013. BUY.

Aaron Alber, Richard Malzer

Equity market/CEE

48 2nd quarter 2013

Sector parameters expected to improve in H2 2013

ErsteOTP

PKO

BZ WBK

GNB

Pekao

BREMillennium

BRDTLV

Komercni

KMBAIK

RBI

0.0

0.5

1.0

1.5

2.0

2.5

4% 9% 14% 19%

P/B

2013

e

RoE 2013eQuelle: Raiffeisen Centrobank estimates, Bloomberg

Peer Group ROE – P/B Regression

-50

50

150

250

350

450

550

PKO

PEKA

OBR

EBZ

W MIL

GN

BO

TPEr

ste KB TLV

BRD

2012 2013eSource: Companies, Raiffeisen Centrobank estimates

Cost of risk in bp

Financials

Loan growth remains muted with Russia as exception and a pickup in interest margins is only expected for 2H We continue to prefer PKO BP and GNB due to their attractive multiples and expect recovery potential at Komercni Banka Erste Group should deliver strongest earnings growth on lower risk costs and Romanian turn-around

Sector comparisonCompany Recommendation Target price PER adjusted P/BV DY

2013e 2014f 2013e 2014f 2013e 2014f

Erste Group Hold EUR 24.00 10.9 8.7 0.8 0.7 1.9% 2.4%

Komercni Banka Hold CZK 4,200 11.1 10.3 1.5 1.4 6.3% 6.5%

OTP Hold UR 8.0 7.0 0.8 0.7 4.3% 5.2%

PKO BP Buy PLN 39.80 12.5 11.2 1.6 1.5 3.6% 4.0%

BZ WBK Hold PLN 278.0 13.1 11.4 1.9 1.7 3.8% 4.4%

Getin Noble Bank Buy PLN 2.05 12.3 9.7 0.9 0.8 0.0% 0.0%

Bank Pekao SA Hold PLN 167.0 14.7 14.1 1.7 1.7 5.1% 5.3%

BRE Bank Hold PLN 366.0 12.5 12.9 1.4 1.4 3.6% 3.9%

Bank Millennium Reduce PLN 4.86 14.2 12.4 1.1 1.1 1.8% 2.4%

BRD-GSG Reduce UR 13.8 9.1 1.0 0.9 2.7% 4.2%

Banca Transilvania Hold UR 8.7 8.0 0.9 0.8 0.0% 2.1%

Komercijalna Buy RSD 1,400 6.9 6.3 0.4 0.4 0.3% 0.0%

Aik Banka Buy RSD 1,940 4.3 4.0 0.3 0.3 0.0% 0.0%UR = under revision Source: Raiffeisen Centrobank estimates

Ahead of 1Q 13 reporting season, we sum up the major country-wise trends for banks in their core markets in 2013: (1) NIM pressure on the 150 bps key rate cut in PL, (2) expected cost of risk reduction in Romania, (3) weaker loan growth outlook in CZ, (4) new FTT, FX mortgages on the political agenda in HU and (5) increasing competition on consumer lending /cost of risk pick up in Russia. We also remind that the last three big-sized share sales in PL (PKO,PEO and BZW totalling ~EUR 3,5 bn) should eliminate the risks of similar deals to happen in the short-term.

In Poland we expect the first visible impact of the key rate cuts to weight particu-larly on the lending yields as assets should re-price quicker than term deposits. Recent KNF data indicated a combined NII + F&CI drop of 9% yoy in January 13. The profitability support in 1Q13 should come from operating and risk costs with an expected switch from corporate to retail impairments. In our universe, we expect highest NIM pressure at PKO, PEO and lowest at GNB . We continue to prefer PKO BP and GNB over the rest due to their attractive multiples and their relative high leverage on the local macro recovery. Possible M&A activity in Po-land has also been in the investor focus at Erste Group where market participants speculated on a possible capital increase in connection with a market entry in Poland and repayment of participation capital.

Following three red quarters in 2012, we expect BRD to return to (tiny) profitabil-ity on lower CoR in 1Q 13. On the contrary TLV’s strong 2012 profitability base looks hardly sustainable in 2013 particularly due to assumed deterioration of NIM / CoR balance. Both banks are expected to benefit from lower government bond yields if selling bonds on the market. Given the strong performance of both, TLV’s in the last 12m and BRD’s in the short term, we would take a neutral stance on both for the time being, but with more appeal to the latter once the earnings recovery gets more ground.

Stefan Maxian, Jovan Sikimic

492nd quarter 2013

Utilities

Sector comparison

Company Recommendation Target price PER EV/EBITDA DY

2013e 2014f 2013e 2014f 2013e 2014f

CEZ UR CZK 670.0 8.0 7.9 5.0 5.2 7.3% 7.5%Enea Buy PLN 18.40 10.5 12.4 3.2 4.1 2.9% 2.4%Enel OGK-5 Buy RUB 2.28 6.1 6.3 4.6 4.5 2.5% 4.0%E.On Russia Buy RUB 4.18 8.9 9.2 4.8 4.9 4.5% 4.3%EVN Hold EUR 11.30 11.9 9.7 3.1 2.9 3.4% 3.9%Federal Grid Company Hold RUB 0.22 8.7 8.0 4.4 4.6 1.1% 1.3%InterRAO Hold RUB 0.028 9.6 8.4 3.1 2.7 1.0% 1.8%PGE Hold PLN 18.00 9.9 11.3 4.1 4.6 5.6% 4.9%PGNiG Reduce PLN 5.00 12.4 10.3 6.6 5.5 2.4% 2.9%RusHydro Buy RUB 1.01 7.0 4.8 3.7 2.8 2.0% 4.1%Tauron Reduce PLN 4.50 9.4 9.7 4.6 5.0 4.3% 4.1%Verbund UR UR 13.5 13.6 7.1 7.3 4.1% 4.1%

UR=under revisionSource: Raiffeisen Centrobank estimates

Utilities – it isn’t getting better …

-20%-15%-10%

-5%0%5%

10%15%

PGN

iGTr

ansle

cetri

caE.

On

Russ

iaEu

rost

oxx5

0Tr

ansg

azD

J Eur

osto

xx U

tiliti

esEn

el O

GK-

5EV

NTa

uron

RusH

ydro

Inte

rRA

OPG

EVe

rbun

dEN

EATa

uron

CEZ

Source: Bloomberg

Sector continues to underperform

50

70

90

110

50

70

90

110

Dec-12 Jan-13 Feb-13

Power (EUR/MWh)Oil (EUR/bbl)CO2

Source: Bloomberg

CO2 continues to head south

The broad market posted a good performance, but utilities continued to be af-fected by the negative electricity price trend and also the reporting season did not bring compelling results. Only Russian utilities performed well – including our “buy” recommendations E.ON Russia and Enel OGK-5. The lion’s share of utilities’ results met expectations for the year 2012 across the board, but the outlook for the new business year were fairly muted and to some extent below market expectations. EVN even negatively surprised the market with an early profit warning.

The political situation remains negative for utilities companies: decisions are still long in coming both at the national and at EU level, which compounds the dif-ficulties of the market model. In Poland there was no progress on gas market liberalisation – only the draft on the oil and gas exploration tax has turned out lower than expected. Market conditions have become tougher also in South-Eastern Europe: as expected, CEZ has lost the licence in Albania, and in Bulgaria high electricity bills have led to nation-wide protests that eventually culminated in a change of government. Moreover, EVN and CEZ had to put up with consider-able tariff cuts.

Q2 13 is expected to bring more clarity on regulatory and reorganisation issues in the Russian power utilities sector. The revised power market model is to be approved by July 1, but we would expect first comments already in Q2, which might be positive for generation companies. The reorganisation in the grid seg-ment is to be finalised in Q2 13, but we currently see few potential triggers for Federal Grid and MRSK Holding and do not expect the valuation to offer decent arbitrage opportunities. Also, we expect RusHydro and Enel OGK-5 to present their long-term strategies including cost-cutting initiatives soon. Dividends are still an issue particularly in Poland (but the amounts to be distributed have not yet been set) and Russia (E.On Russia). We currently have “buy” recommendations on E.On Russia, Enel OGK-5, RusHydro and Enea.

Teresa Schinwald

Electricity prices slightly above EUR 40/MWh, critical mark to be reached soon? Russia the only attractive market “Buy” recommendations: E.On Russia, Enel OGK-5, RusHydro

50 2nd quarter 2013

Oil & Gas

Upstream remains a safer bet in the current environment

Sector comparison

Company Recommendation Target price PER EV/EBITDA P/CE

2013e 2014f 2013e 2014f 2013e 2014f

OMV Hold EUR 35.90 6.5 7.7 3.6 3.5 2.6 2.8OMV Petrom Buy RON 0.50 6.2 6.0 3.0 2.8 3.4 3.4MOL Buy HUF 20,500 10.4 10.0 5.4 5.4 3.1 2.9PKN Reduce PLN 50.00 10.8 10.4 6.1 5.7 7.3 3.9Lotos Sell PLN 33.50 7.4 5.2 6.5 5.2 2.7 4.5Gazprom Hold RUB 145.0 3.4 3.0 2.6 2.1 2.2 2.1Novatek Buy RUB 446.0 10.5 9.0 6.9 5.8 8.6 8.8LUKoil Buy RUB 2,555 5.5 5.5 3.2 3.2 3.4 3.4Rosneft Hold RUB 246.0 10.6 10.0 6.0 5.6 5.3 5.2Tatneft Reduce RUB 198.0 6.7 6.9 4.7 5.0 5.1 5.3Source: Raiffeisen Centrobank estimates

Crude oil (Brent) has firmly settled above the USD 100/bbl mark, providing integrated companies with a strong incentive to expand their upstream invest-ments in order to speed up the exploration of existing hydrocarbon reserves and/or add new ones. At the same time, the depressed refining environment in the aftermath of the financial crisis forced both integrated companies as well as pure-play refiners to adopt new development strategies aiming at strengthening the profitability of their refining operations. A wide range of strategic decisions were implemented, including partial divestments of downstream assets (OMV, OMV Petrom), development of a complex set of measures aiming at improving refining efficiency (MOL, OMV), investments in refinery upgrades (OMV Petrom, Lotos, Russian oils) or increasing the complexity of petchem operations (PKN).

Both upstream and downstream players continue to face various challenges, which could materially affect their operations. The upstream companies from our universe are exposed to the risk of declining production in their mature oil/gas fields (OMV, OMV Petrom, MOL), political instability in the MENA region (OMV, MOL) and regulatory risks (OMV Petrom, MOL). We are more concerned, though, about the weak environment to which the European refiners are exposed. In spite of surprisingly strong refining margins experienced during 2012, we be-lieve there is a weak fundamental support for motor fuel crack spreads to stay at last year’s level. We reckon that the refining sector benefited from a number of unforeseeable events in 2012, while fundamental factors continued to weaken (i.e. motor fuel consumption, economic activity, etc.). With no change of macro trends expected for the CEE economies, we maintain our cautious view for the refining sector. We remain bullish on the upstream sector, reckoning with a robust oil price in the short to medium term. In spite of modest growth in oil demand that the International Energy Agency forecasts for 2013 (cc. 1% yoy), we believe that the risk of a sharp correction of the oil price is limited. The downward adjust-ment of its output in 2012 proves that OPEC remains in favour of price stability. This fact should offset the potential price pressure coming from growing North American crude production.

Oleg Galbur

-1000

-500

0

500

1000

Afri

ca

Asi

a

Euro

pe FSU

Latin

Am

eric

a

Mid

dle

East

Nor

th A

mer

ica

2011 2012 2013f

*mnboepdSource: IEA Oil Market Report January 2013

World Total Oil Demand growth*

0123456789

101112

Jan

Feb

Mar

Apr

May Jun Jul

Aug Sep

Oct

Nov

Dec

Range (2007-12)Margins in 2012

* North-Western EuropeanSource: Thomson Reuters

NWE* refining margins, in USD/bbl

Strong oil prices supported by global oil demand growth and OPEC accommodative policy With little improvement of fuel consumption refining margins are expected to stay weak We favour upstream players (OMV Petrom, MOL, Novatek and LUKoil)

512nd quarter 2013

Real Estate

Market conditions in CEE/SEE still challenging Investments to focus on German real estate market in 2013 CA Immo and Warimpex still on the buy list

The year 2012 was another year of challenges for the entire real estate sector. The overall valuation trend was once again negative in the CEE countries, which filtered through to substantial devaluations at Atrium, CA Immo and especially the Q4 results of GTC. Whereas the office market in Warsaw is highly competi-tive and pressure on the rent level can already be observed in several locations as a result of the large supply of new premises, substantial parts of the region are characterised by stagnation with largely stable yields. Negative valuation adjust-ments above all mirror the more conservative stance of real estate appraisers by assuming lower rent growth than originally expected over the next years. The investment market for commercial properties in CEE registered a considerable drop by some 40% compared to the previous year. The combination of illiquid-ity together with defunct pricing and transparency of CEE real estate markets still poses a decisive risk factor for international investors, which is accordingly reflected in valuation discounts.

In the past few months, there were some negative surprises also in terms of oper-ating business trends. After a profit warning from Immofinanz in December last year, conwert followed suit in January by announcing significant goodwill and real estate value impairments. GTC reported a significant loss for the year on the back of hefty devaluations of real estate in South-Eastern Europe. Austrian real estate players are increasingly becoming interested in the more liquid and stable German real estate market: conwert has taken over more than 70% of German residential real estate company KWG, and Immofinanz also plans sizeable in-vestments in this segment given a possible stock market flotation of its residential real estate subsidiary BUWOG.

Within the real estate sector we continue to favour CA Immo and Warimpex. CA Immo’s planned sale of the large-scale Tower 185 project in Frankfurt is drawing nearer, and the management expects binding offers still in the course of the first half of the year. Warimpex managed to close the year 2012 on a very positive note thanks to the sale of the Hotel InterContinental, and more restructuring impe-tus for the group should be expected in the coming months.

Christoph Thurnberger

Caught between stagnation in CEE and a hype in Germany

-70%-45%-20%5%30%55%80%105%130%

-10

-5

0

5

10

15

20

Imm

ofin

anz

CA

Imm

o

S Im

mo

Atri

um

War

impe

x

conw

ert

Share price (EUR)NAV reported (EUR)Trading discount

Source: Companie data, Bloomberg

P/NAV valuation

4

7

10

13

Q3 08 Q3 09 Q3 10 Q3 11 Q3 12Vienna PragueBudapest WarsawBucharest Moscow

Source: CBRE, Raiffeisen Centrobank

CEE prime office yields (%)

Sector comparison

Company Recommendation Target price PER EV/EBITDA DY

2013e 2014f 2013e 2014f 2013e 2014f

Atrium Hold EUR 4.90 11.6 12.4 14.1 12.3 3.8% 4.2%conwert UR EUR 10.0 34.8 31.2 21.2 20.9 2.3% 2.3%Immofinanz Hold EUR 3.40 11.8 10.0 15.5 14.3 4.6% 6.1%CA Immobilien Buy EUR 12.70 10.2 9.8 13.7 14.3 3.5% 3.5%S IMMO Hold EUR 5.00 13.8 14.2 14.9 13.8 2.1% 2.1%Warimpex Buy EUR 1.70 44.8 neg. 12.7 13.1 0.0% 0.0%Globe Trade Centre UR UR 18.8 14.4 12.4 12.8 0.0% 0.0%Echo Investment Hold PLN 6.00 12.8 14.4 23.0 17.7 0.0% 0.0%Polnord Hold PLN 11.10 9.8 neg. 6.2 38.0 0.0% 0.0%UR = under revision Source: Raiffeisen Centrobank estimates

52 2nd quarter 2013

Construction

Sector comparison

EV/EBIT PER EV/EBITDA

Company Recommendation Target price 2013e 2014f 2013e 2014f 2013e 2014f

Mostostal Warszawa Hold PLN 15.20 16.1 15.7 31.4 32.1 7.6 6.8

Budimex Hold PLN 71.00 6.7 15.1 11.9 20.8 5.8 12.0

STRABAG SE Hold EUR 20.00 8.9 6.4 15.8 13.4 3.3 2.5

Wienerberger Buy EUR 10.00 28.1 16.6 neg. 30.7 7.5 6.2Source: Raiffeisen Centrobank estimates

The difficult environment persists

-10

-8

-6

-4

-2

0

2

4

2008

2009

2010

2011

2012

2013

2014

GDP Total construction output

*EC-19 (annual % change) Source: Euroconstruct

Construction and economic growth*

-30

-20

-10

0

10

20

30

40

Jan-09 May-10 Sep-11 Jan-13

Source: Thomson Reuters

PL: Output volume (% yoy)

Looking at the troubles the Polish construction sector continues to undergo, one can see that a strong balance sheet, conservative accounting practices as well as adequate contract controlling are the building blocks that help the companies to survive the price war and the break in the infrastructure boom. Hence, Budimex remains the clear winner of the situation with no need of any significant and painful restructuring (apart from some organisational streamlining) and even the costly and unsuccessful acquisition of PNI has not undermined the company’s fi-nancial standing. Nevertheless, we are not very optimistic for 2013, particularly in terms of revenue generation. Yet, we see some light at the end of the tunnel as the competition has been partially decreasing in the sector (bankruptcies), pressure on building material prices has eased as well as most of the companies have restructured their fixed cost bases. We see this year down-trending in terms of revenues, yet with some pick-up in profitability.

We continue to rate STRABAG a “hold”. The 2013 targets call for a flattish out-put of EUR 14 bn and EBIT of at least EUR 260 mn. Earnings growth vs. 2012 is essentially driven by the lack of one-off charges which makes the increase less impressive. Moreover valuation remains demanding. We have upgraded Wienerberger to “buy” due to an improved risk-reward profile. Unlike in previ-ous years, the management has already committed to a financial target which, despite being in line with our forecasts, was a positive surprise and probably a sign of confidence. The recovery of the North American housing market should be sustained and support earnings growth. Nevertheless, Wienerberger remains a play on Europe (sales exposure >90%), where despite the still challenging fundamentals the hope for a bottoming-out of demand momentum in several main markets seems increasingly warranted. No further restructuring measures are planned for 2013. Driven by capex discipline, the company should generate substantial FCF in the next years. The disposal of non-core assets could result in an extra cash inflow.

Markus Remis, Bartlomiej Kubicki

2013 is set to be another tough year for the industry For Polish constructors we see pressure on sales albeit some pick-up is expected in profitability Our current sector favourite is Wienerberger

532nd quarter 2013

Metals & Mining

Sector comparison

Company Recommendation Target price PER EV/Sales EV/EBITDA

2013e 2014f 2013e 2014f 2013e 2014f

AMAG Hold EUR 25.00 12.0 10.8 1.1 1.0 6.7 6.2

Bogdanka Buy PLN 170.0 9.8 6.4 2.3 1.6 5.5 3.7

Evraz Hold GBP 327.0 31.5 16.8 0.6 0.6 4.4 3.8

JSW Buy PLN 111.0 12.9 16.2 1.0 1.0 3.5 3.7

KGHM Reduce PLN 178.0 10.9 8.9 1.3 1.3 5.0 5.2

Mechel Hold USD 7.00 15.3 13.7 0.8 0.7 6.5 5.9

MMK Buy USD 5.40 36.2 23.2 0.5 0.5 4.3 3.8

New World Resources Reduce CZK 83.00 neg. neg. 1.0 1.0 8.2 10.1

NLMK Hold UR 9.8 7.9 1.0 1.0 6.4 5.4

Petropavlovsk Hold GBP 430.0 6.0 4.6 1.5 1.4 4.0 3.5

Polymetal International Buy GBP 1,356.0 8.2 7.2 2.3 2 4.7 4.1

RHI Buy EUR 31.50 9.0 8.1 0.7 0.6 5.9 5.2

Severstal Hold USD 12.60 9.4 8.4 0.7 0.7 5.4 5.1

voestalpine Hold EUR 29.00 8.9 6.6 0.6 0.6 5.4 4.7UR = under revision Source: Raiffeisen Centrobank estimates

Over January-February China’s total crude steel production reached 125.5 mn tonnes with the average output of 2.13 tonnes per day, up by 12.5% yoy. Fin-ished steel inventories jumped by 19% mom in March as a result of slow buying activity. In our view, continuous growth in global steel output should limit robust steel price appreciation in Q2 13e. Given lacklustre demand and growing steel inventories, raw materials prices (iron ore and coal) are expected to fluctuate around the current levels. Weak pricing conditions are expected to continue to undermine the profitability of major steel and mining companies - including Russian names. On a positive note, we expect a seasonal pick-up in end-user de-mand thanks to the construction and machine-building segments, and this should lead to growing steel sales volume, thus helping offset the price weakness to some extent. In our view, a kind of price balance might be reached in the middle of Q2 13e, which would help revive buying activity. However, pending risks over unresolved fiscal tightening measures in the US and the stagnating economy in the EU region should continue to add to the uncertainty in the sector. The majority of the companies will probably continue to focus on cost-cutting measures and cost efficiency rather than investing in projects to foster organic expansion. An-nouncements of Q1 13e financial results – which are expected in the middle of Q2 13e (for the Russian steel names) – should likely be considered a non-event by the market as we envisage little improvements qoq. For Q2 13e we maintain our neutral view on the sector. We believe that the Russian steels might reach at-tractive share price levels due to the on-going correction. Following the growing uncertainty in the US and EU, weakness in precious metals prices might continue through Q2 13e. In the near term we see no solid positive catalysts for the metal. Given limited visibility in the sector, we recommend focusing on those names which, in our view, are capable to improve profitability in otherwise weak market conditions due to efficiency of their operations, growing economies of scale and attractive valuation levels (e.g. RHI, Bogdanka, MMK).

Irina Trygub-Kainz

Waiting for an upswing in demand

-8.0% -3.0% 2.0% 7.0% 12.0%

AluminiumGoldSilver

CopperNickelScrap

Coking coalBilletCRCHRC

Iron ore, Fe 62.5%Slab

Source: Bloomberg

Performance Q1 2013

0

200

400

600

800

1,000

0

50

100

150

Jan-11 Oct-11 Aug-12

Total Weekly Steel inventory, China(Beijing), 10,000 tHRC steel index futures, USD/t

China: steel inventory vs. HRC price

Fast growth in China’s steel output pressures steel prices Demand growth in Q2 13e to be undermined by global macro risks On-going correction: steel stocks are approaching attractive investment levels

Source: Bloomberg

54 2nd quarter 2013

Equities – top picks

Recommendation: Buy Current share price: EUR 10.931 / Target price: EUR 12.70 Market capitalisation: EUR 960 mn

The group’s 4Q results were boosted by a strong earnings contribution from the sale of real estate, but nevertheless came in below our expectations overall. CA Immo not only surprised the market with lower rental income (a consequence of property sales) but also by posting a negative valuation result in the segment Eastern Europe, which was not offset by positive valuation effects in Austria and Germany. Despite lower income from property sales, the group managed to keep its EBITDA constant in the business year 2012 but boosted its adjusted FFO (operating cash flow from the core business) by more than 30%. Net profit was 13% down on the corresponding figure of the previous year.

Management intends to propose the same dividend of EUR 0.38 per share as last year (dividend yield: approx. 3.5%). The group is positioning itself as a dividend stock and plans a payout policy of some 2% of the net asset value. CA Immo pursues a clear strategy with a focus on strengthening its balance

sheet and enhancing its profitability. A comprehensive sales programme of properties envisaged for 2013 (75% of the office property “Tower 185” in Frankfurt and other properties totalling at least EUR 250 mn) is to accelerate debt reduction and improve the equity ratio from currently 31% to 35% in a first stage (medium-term target: 40%). The group is conducting a structured sale of its large-scale project Tower 185 and expects to receive first bind-ing offers still in the course of the first half of 2013. In addition, CA Immo plans to invest roughly EUR 200 mn in its development pipeline - above all in high-quality office objects on the Ger-man market.

After a phase of strong expansion, the real estate group is now concentrat-ing on enhancing its profitability and dividend capacity. The group wants to capitalise on its core expertise – the development and management of modern and energy-efficient office properties in Central Europe. In an-ticipation of the planned portfolio re-sizing and efficiency improvement, a massive cost-cutting programme has been started.

Christoph Thurnberger

Key ratios

2012 2013e 2014f 2015f

EPS 0.62 1.07 1.11 1.18

PER 16.9 10.2 9.8 9.3

FFO per share 1.10 1.05 1.05 1.13

Price FFO 10.5 10.4 10.4 9.7

Book value per share 19.3 20.0 20.7 21.5

Price book value 0.5 0.5 0.5 0.5

Dividend yield 3.6% 3.6% 3.6% 3.6%

ROE 3.2% 5.4% 5.5% 5.6%

ROCE 3.1% 4.1% 4.2% 4.3%

EV/EBITDA 17.0 13.7 14.3 13.8Source: CA Immobilien, Raiffeisen Centrobank estimates

CA-Immobilien: Clear focus on boosting profitability

Income statement & balance sheet (IFRS)

in EUR mn 2012 2013e 2014f 2015f

Income Statement

Consolidated sales 356 363 351 356

EBITDA 245 259 241 241

EBIT 230 265 247 247

EBT 73 117 122 130

Net profit b.m. 49 88 92 98

Net profit a.m. 54 94 98 104

Balance sheet

Total assets 5,888 5,335 5,328 5,229

Shareholders' equity 1,693 1,753 1,818 1,888

Goodwill 36 36 36 36

NIBD 3,122 2,484 2,399 2,272Source: CA Immobilien, Raiffeisen Centrobank estimates

M A M J J A S O N D J F M 7.007.508.008.509.009.50

10.00 10.50 11.00 11.50

CA IMMOBILIENATX - AUSTRIAN TRADED INDEX

Source. Thomson Reuters

CA-Immobilien

1 the indicated price is the last price as available at 6.30 a.m. (CET) on 21 March 2013

552nd quarter 2013

Key ratios

2012 2013e 2014e 2015e

EPS 1,587 1,598 1,659 1,643

PER 11.2 10.4 10.0 10.1

Operating CF per share 5,098 5,278 5,799 5,801

Price cash flow 3.5 3.1 2.9 2.9

Book value per share 19,051 17,784 18,941 20,086


Dividend yield 2.4% 3.0% 3.0% 3.0%

ROE 8.4% 8.7% 9.0% 8.4%

ROCE 5.9% 6.9% 7.0% 7.3%

EV/EBITDA 5.8 5.4 5.4 5.2Source: MOL, Raiffeisen Centrobank estimates


in HUF mn 2012 2013e 2014f 2015f

Consolidated sales 5,527,070 5,861,880 5,743,704 5,855,333

Material expenses -1,087,764 -4,692,685 -4,553,979 -4,627,442

Personnel expenses -264,675 -271,513 -276,943 -282,482

Other operat. Exp. -3,711,422 -319,763 -313,664 -321,764

EBITDA 538,891 607,228 624,964 647,066

Deprec. & amort. -318,440 -316,498 -322,494 -330,076

EBIT 220,451 290,730 302,470 316,989

Financial result -13,761 -55,796 -55,052 -62,722

EBT 206,690 234,934 247,419 254,267

Taxes on income -52,254 -55,734 -58,023 -56,654

Minority interests -12,946 -36,649 -41,439 -51,125

Net profit a.m. 141,490 142,551 147,957 146,489Source: MOL, Raiffeisen Centrobank estimates


M A M J J A S O N D J F M 14

15

16

17

18

19

20

MOL MAGYAR OLAJ-ES GAZIPARI BUDAPEST (BUX)


MOL


Recommendation: Buy Current share price: HUF 16,6151 / Target price: HUF 20,500 Market capitalisation: EUR 4,852 mn

We reckon that the recent drop of MOL’s share price was not driven by funda-mentals (with the oil price remaining strong and refining margins rebounding), but rather by worsening investors’ sentiment due to an unpredictable fiscal en-vironment in Hungary. Moreover, the sale of 1.675 mn MOL shares (1.6% of the total) by Dana Gas at a discount has also put pressure on the share price, although we would rather welcome the increase of MOL’s free float.

We believe that the market is overestimating the impact of existing and possi-ble austerity measures on MOL’s domestic earnings. Even with an unexpectedly higher Robin Hood tax approved last November MOL should pay lower special taxes starting 2013 (we estimate the 2013 tax savings at HUF 20 bn). At the same time, the rumoured utilities price cuts for households could affect only a small part of MOL’s earnings and thus have an insignificant impact on the Gas Midstream segment. Consequently, we see only a limited risk for domestically derived earnings.

The management has confirmed its medium/long-term targets and reiter-ated that it would focus on field rede-velopment activities in Hungary and Croatia to stabilise the annual decline to below 5%. The short/medium-term production should be driven by the growing output from Pakistan. To-wards the end of 2013e the manage-ment expects to see the first production from Kurdistan with a daily flow of 3-4 ts boe. Overall, the management esti-mates the average hydrocarbon pro-duction at cc. 110 ts boepd in 2013e, some 4% lower yoy with the output decline in Hungary and Croatia be-ing partially offset by more barrels to be produced in Pakistan and Russia. In the downstream segment the man-agement will probably continue imple-menting the efficiency improvement program, aiming at USD 250 mn of additional clean EBITDA.

Oleg Galbur

MOL: Robust fundamentals outweigh domestic uncertainties

56 2nd quarter 2013

Azoty Tarnów emerged as a beneficiary of the Polish chemical industry consoli-dation. Its acquisition of fertiliser and chemicals producers Police and ZAK cou-pled with the recent purchase of Pulawy (that should result in synergies exceeding PLN 100 mn per year) have created the second largest producer of fertilisers in the EU and one of the top players in a number of chemical products. Owing to an improving situation of an average Polish farmer, supported by EU subsidies, fertiliser sales should be responsible for the majority of operating profits in the subsequent years. The outlook is especially promising for nitrogen-based fertilis-ers in 2013. The group’s ammonia installations are among the most efficient ones globally (lower gas input needed); since the company had to cope with higher prices of gas than its competitors, this implies that superior efficiency was required to compete on the European market.

We believe that despite a margin squeeze in the plastics, pigments and oxo segments the company’s EBITDA should exceed PLN 1 bn, implying an EV/EBITDA ratio of approx. 5.5x in 2013e. We assume a considerable im-provement of EBITDA in 2014, when synergies with Pulawy are executed. Given that the margins earned on chemicals are currently close to histori-cally low levels any signs of recovery should translate into a price increase. The major European producers have already started price hikes in Febru-ary and March. Since Azoty Tarnów is practically a debt-free company, the acquisition story may continue. Azoty Tarnów is finalising a purchase of the state-owned Siarkopol sulphur mine that is expected to secure feedstock supplies and remains among the ma-jor candidates to acquire Ciech’s plant protection chemicals business and in the longer term possibly also Anwil, the second-largest fertiliser producer in Poland. We see the Polish state as supportive for the expansion plans of the company which also include a large investment programme in the petrochemicals installation in northern Poland in the following years.

Dominik Niszcz



Key ratios

2011 2012 2013e 2014f

EPS 9.32 4.16 5.35 6.54

PER 2.9 12.90 10.3 8.4

Operating CF per share -3.37 8.48 11.15 10.73

Price cash flow -8.1 6.4 5.0 5.1



Dividend yield 0.0% 2.9% 4.7% 6.0%

ROE 21.7% 9.2% 12.5% 12.1%

ROCE 18.0% 8.8% 11.2% 10.9%

EV/EBITDA 2.9 6.4 5.4 4.5Source: Azoty Tarnow, Raiffeisen Centrobank estimates


in PLN mn 2011 2012 2013e 2014f

Income Statement

Consolidated sales 5,338 7,099 10,354 10,818

EBITDA 770 611 1,067 1,259

EBIT 581 372 683 840

EBT 564 376 679 853

Net profit b.m. 499 259 550 691

Net profit a.m. 462 299 515 649

Balance sheet

Total assets 4,902 5,340 8,422 8,890

Shareholders' equity 2,750 3,077 5,186 5,577

Goodwill 9 9 217 217

NIBD 150 247 85 -79Source: Azoty Tarnow, Raiffeisen Centrobank estimates


30

35

40

45

50

55

60

ZAKLADY AZOTOWE W TARNOWIE MOSCICACHWARSAW GENERAL INDEX 20


Azoty Tarnow

Azoty Tarnow: Beneficiary of the chemicals market consolidation

Recommendation: Buy Current share price: PLN 55.201 / Target price: PLN 67.00 Market capitalisation: EUR 1.310 mn

572nd quarter 2013

Since a moderate correction after the weak Q4 12 performance - which was additionally spiced-up by the pessimistic management statement with regard to the NIM sensitivity on the key rate cuts - PKO’s stock was quite robust in our financials coverage basket, being in-line with the WIGBank Index and 2% better than Pekao SA. Moreover, it seems that the market still considers Poland as a safe haven, which helped PKO to outperform CEE players EBS and OTP by 7-8% in the last 2 weeks – this became particularly visible during the Cyprus issue. On top of this, the stock has in fact almost ignored the last unexpected key rate cut which gives hope that the downward rate cycle totalling 150 bp since Nov 2012 may come to an end. However, we advise that in the short term the stock has to overcome high NIM pressure in H1 13 which we assume to have been digested by the consensus.

Overall, the set of expectations does not look very demanding at this stage. With -9% yoy for 2013 we are at the consensus average. We expect core revenues to decline by 4% yoy after they ended 2012 at +2% yoy follow-ing +11% yoy in 2011, which we argue by the a.m. lower rates and moderately deeper F&CI. Cost of risk is seen down 8 bps to 148 bps, while the increase of operating costs should not exceed the inflation level as they did in 2012, lifting the C/I from 40% in 2012 to 42% in 2013. PKO is ob-viously assuming an active role of a potential consolidator in PL. While we found possible synergies from a hypo-thetical alliance with Bank Millennium at costs and funding, the recent ru-mours about Nordea Bank’s PL assets put the emphasis on the smaller target but with similar loan book split. Nor-dea’s reliance on the parent’s cheap funding (L/D at 200%) would not be sustainable, reducing the synergies to cost control and presumably on a cross-sell ratio. Nordea shows solid asset quality, although a rapidly de-teriorating performance in 2012. As in the case of MIL, Nordea’s RWA of PLN 22 bn would not trigger an imme-diate capital increase at PKO in our view, provided no “overpaying”.

Jovan Sikimic

Key ratios

2012 2013e 2014e 2015e

EPS adj. 3.00 2.73 3.06 3.25

PER 12.3 12.5 11.2 10.5


Price book value 1.87 1.61 1.48 1.37

Price tang. book value 1.87 1.61 1.48 1.37

DPS 1.20 1.23 1.38 1.46

Dividend yield 3.3% 3.6% 4.0% 4.3%

ROE adj. 15.8% 13.3% 13.8% 13.5%

Loan/deposits 103.0% 102.0% 101.0% 101.0%

Tier 1 ratio 13.4% 14.3% 15.1% 15.8%Source: Ciech, Raiffeisen Centrobank estimates

PKO BP: Latest key rate cut does not change the story


in PLN mn 2012 2013e 2014e 2015e

Income Statement

Net interest income 7,883 7,518 7,862 8,221

Risk provisions -2,325 -2,238 -1,968 -1,932

Net commission income 3,072 3,037 3,127 3,222

Net trading result 359 347 335 325

Pre-tax profit 4,647 4,217 4,732 5,024

Net profit after minorities 3,748 3,412 3,829 4,065

Balance sheet

Customer loans 150,652 152,378 156,177 161,405

Customer deposits 146,194 149,596 154,582 160,108

Shareholders‘ equity 24,708 26,621 28,914 31,257

Total assets 193,480 196,106 201,686 208,109Source: PKO BP, Raiffeisen Centrobank estimates

Source: PKO BP, Raiffeisen Centrobank estimates

M A M J J A S O N D J F M 3031323334353637383940

PKO BANKWARSAW GENERAL INDEX 20


PKO BP


Recommendation: Buy Current share price: PLN 34.201 / Target price: PLN 39.80 Market capitalisation: EUR 10,230 mn

58 2nd quarter 2013


After three years of declining crude output, LUKoil, the second largest private vertically integrated oil & gas company globally by 1P reserves, is set to return to operating growth in 2013 on the back of increased investment in the E&P segment. Initial results are expected to become visible as early as this year, but the major boost is expected in 2014-15 following several greenfield launches, including in the Caspian Sea, which should reaffirm the company’s dominating position in the Russian energy sector – 19% of total Russian oil production and of total Russian oil refining. In 2012, LUKoil managed to halt the decline in produc-tion, which stabilised at 1.8 mn bblpd.

LUKoil also plans to optimise investments in overseas projects, including a cut to the 10-year capex target for Western Qurna 2 of 21% to USD 26 bn. This will free up substantial cash flow and create room for higher dividends or share buybacks. LUKoil’s strategy also includes a significant rise in dividend payments, with a payout ratio hike from 20% in 2011 to 40% of US GAAP net income in

2021. For 2012, the company plans to increase its dividend payments by 20% yoy to RUB 90 per share, with a remaining dividend of RUB 50, imply-ing a 4.6% annual yield and a 2.5% yield for the remainder. Management has confirmed plans to boost dividend payments and is expected to continue to support the stock via the buyback program in 2012/13-2015.

LUKoil has been underperforming its peers on a weak operating per-formance and now trades at a 46% discount to key rival Rosneft on EV/EBITDA 2013e. However, we expect the discount to narrow on the back of stronger operating trends and stable dividend increases of at least 15% yoy. In addition, LUKoil plans a USD 2.5 bn buyback in 2013-15, which represents about 5% of its market cap-italisation, and management intends to continue using bonuses to buy back shares from the market.

Andrey Polischuk

Key ratios

2012 2013e 2014f 2015f

EPS 14.13 11.44 11.36 11.58

PER 4.6 5.5 5.5 5.4

Operating CF per share 24.39 18.63 18.71 18.41

Price cash flow 2.7 3.4 3.4 3.4



Dividend yield 4.4% 5.4% 5.1% 5.2%

ROE 15.6% 11.4% 10.3% 9.8%

ROCE 14.4% 10.9% 10.0% 9.6%

EV/EBITDA 3.2 3.2 3.2 3.2Source: LUKoil, Raiffeisen Centrobank estimates

LUKoil: Growth expected in 2013


in USD mn 2012 2013e 2014f 2015f

Consolidated sales 139,171 131,070 133,241 136,876

Material expenses -9,359 -10,170 -10,536 -11,287

Personnel expenses -3,755 -4,001 -4,177 -4,425

Other operat. Exp. -43,037 -41,485 -42,245 -43,218

EBITDA 18,872 17,540 17,961 18,845

Deprec. & amort. -4,832 -5,217 -5,594 -6,065

EBIT 14,040 12,323 12,367 12,780

Financial result -238 -972 -1,091 -1,294

EBT 13,802 11,351 11,277 11,486

Taxes on income -2,877 -2,327 -2,312 -2,355

Minority interests 79 -113 -113 -114

Net profit a.m. 11,004 8,911 8,852 9,017Source: LUKoil, Raiffeisen Centrobank estimates


1500

1600

1700

1800

1900

2000

2100

OIL COMPANY LUKOILRUSSIAN MICEX INDEX


LUKoil

Recommendation: Buy Current share price: RUB 1,9401 / Target price: RUB 2,555 Market capitalisation: EUR 41,325 mn


592nd quarter 2013

Targ

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Cap

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Cen

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nk

Equities – region overview

60 2nd quarter 2013


Targ

etM

Cap

.Fr

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P/E

P/B

EV/E

BITD

AD

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entro

bank

632nd quarter 2013

Energy19.1%

Materials16.8%

Telecommunications2.6%

Utilities9.6%

Banks31.7%

Consumer staples4.0%

Insurance13.3%

Real Estate1.1%

Software & Services1.8%

Sector weightings Poland, WIG 20

Dom. market cap.: EUR 131.9 bn (Source: FESE; 28/02/2013)


Energy2.4% Materials

2.8%


Utilities20.2%

Banks37.0%

Food Beverage & Tobacco

1.9%

Consumer Durables1.4%

Hotels, Restaurants, Leisure1.8%

Media1.3%

Retailing0.1%

Insurance19.2%

Sector weightings Czech Republic, PX1

1 excl. Orco PropertySource: Thomson Reuters, Raiffeisen RESEARCH

Sector weightings Hungary, BUX Sector weightings Russia, MICEX

Sector weightings Romania, BET Sector weightings Turkey, ISE 100

Sector weightings in comparison


Energy30.8%

Materials0.3%


Banks33,8%

Pharma & Biotechnology

22.2%

Insurance0.8%

Diversified Financials0.3%

Software & Services0.2%


Energy52,0%

Materials13.9%


Utilities4.9%

Financials18.6%

Retailing3.4%

Transportation0.4%

Consumer Durables0.2%

Automobiles 0.2%

Pharma & Biotechnology0.3%

Capital Goods0.3%

Dom. market cap.: EUR 633.6 bn (Source: MICEX; 28/02/2013)

Source: Thomson Reuters, Raiffeisen RESEARCH Source: Thomson Reuters, Raiffeisen RESEARCH

Energy26.6%

Utilities4.0%

Information Technology

1.5%Financials (Banks incl.

Insurance)44.7%

Health Care3.5%

Investment funds19.7%

Dom. market cap.: EUR 23.2 bn (Source: BSE; 28/02/2013)

Energy4.4% Materials

6.0%

Telecom-munications

6.6%

Utilities0.8%

Financials (Banks incl. Insurance)

51.1%

Industrials13.6%

Consumer discretionary

5.2%

Consumer staples11.9%

Health Care0.2%

Technology Hardware 0.2%


Source: Bloomberg, Raiffeisen RESEARCH Source: Bloomberg, Raiffeisen RESEARCH


64 2nd quarter 2013

ATX


BELEX 15


BUX


Stock markets: corrections could put upward-trends to an end

Technical analysis

ATXLast: 2,542

Since the failure at the Fibonacci-Retracment at 2,530 it has come back quite a bit, but still might confirm bullish-ness at the trend’s high, i.e. 2,255 -> 2,700 – 2,820. Nevertheless it’s recommendable to have an eye on the rising-support line at 2,400 and 2,367. Hitting the latter line would allow for a rebound towards 2,500 still, but would already indicate a decline towards 2,200.

Position: short -> 2,367 – 2,270…Stop 2,530

Prices as of 221.03.2013, 02:58 p.m. CET

BELEX 15Last: 571.88

The consolidation pattern’s high just has been shifted from 573 to 582. The latter one has to be crossed in order to trigger a major buy-signal and confirm the pattern as a bullish reversal. Judging by the low momentum and with regard to the recent retracement to in below of 573 a setback again towards 530 cannot be denied possible. A major reversal would get indicated by failure of 530 -> 500 – 470 to withstand.

Buy 595 -> 615 - 660Stop 560


BUXLast: 18,250

Still the BUX has not broken free from the Symmetrical Tri-angle’s boundaries, a pattern per se to be rated as “neu-tral”. This pattern is located right in below of the major resistance, e.g. 20,000. So either it comes to a significant rally or a bearish reversal, i.e. a failure at the major re-sistance line. Once beyond 20,020 it might make it even towards 22,000, but as up to now a decline towards 15,000 cannot be ruled out.

Sell 17,380 -> 15,600 – 15,000Buy 20,020 -> 22,000


Robert Schittler

652nd quarter 2013

Technical analysis

CROBEX


MICEX


WIG 20


CROBEX 10Last: 1,108

The index – inst the range 945 – 1,200 - still is moving sideways since about 2009. The current optimism same as the upward-trend would not get harmed by a setback to about 1,060, but still is in need of a bullish confir-mation at its trend-high, i.e. 1,128. The Flag pattern is marked in yellow and hints on the bullish confirmation being still somewhat expectable. Its stop is at 1,085: trig-gering of it would indicate a drop towards 1,060.

Position -> 1,160 – 1,180Stop 1,080


MICEXLast: 1,459

Sideways inst the range 1,240 – 1,550 since 2011 the index just has failed at the upper band of the Rectangle. The decline that has started since has not harmed op-timism yet, but would in case it gets prolongated to in below of the rising-support line (green) at 1,425. Would instead this one hold firm it’d soon climb back towards 1,550 -> 1,580.

Sell 1,425 -> 1,350 – 1,240Stop 1,520


WIG 20Last: 2,396

The rising-support line at 2,320 will be put to the test rather soon – with regard to the Measured Move (the index pattern since start of this year) – and most prob-ably fail to withstand. That means the bearish tendency’s prolongation should be due same as a drop towards the blue line (Rectangle) at 2,250, but even 2,165, low as of 2010, might get re-tested. In case 2,330 held firm a rebound to 2,660 would follow suit.

Position -> 2,250 – 2,160Stop 2,520


Robert Schittler

66 2nd quarter 2013

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Middle band Risk Index

RBI EmEurope Risk Index

Last value: 21 March 2013Source: Thomson Reuters, Raiffeisen RESEARCH

Risk factors and sentiment

Quantitative analysis


The Asset Allocation Group of Raif-feisen Research has developed risk indicators to detect periods of above and below average returns (boom and stagnation periods) in financial markets beforehand. Risk index below middle band (boom period): Period of high risk appetite which should be accompanied by above-average returns.Risk index above middle band (stag-nation period): Period of low risk ap-petite in which below-average returns are to be expected.

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

Middle band Risk Index


Last value: 21 March 2013Source: Thomson Reuters, Raiffeisen RESEARCH

Beta to MSCI World and MSCI EM

Beta: Measures the sensitivity of an equity index to changes of a factor (MSCI World and MSCI EM) Beta > 1: The equity index shows larger swings then the factor.Up-Beta: Measures the sensitivity of an equity index to positive changes of a factor (MSCI World and MSCI EM).up-beta > 1: The equtiy index rises more then the factor in positive periods.Down-Beta: Measures the sensitivity of an equity index to negative changes of a factor (MSCI World and MSCI EM).Down-beta > 1: The equtiy index de-creases more then the factor in nega-tive periods.

Beta to MSCI World

Beta Up-Beta Down-Beta Up-DownEM Europe 1.03 1.24 1.13 0.12

Czech Rep. 0.54 0.45 0.48 -0.02

Poland 0.94 0.91 1.18 -0.26

Russia 1.18 1.55 1.24 0.31

Hungary 0.93 0.53 1.12 -0.58

Betas to MSCI World; weekly returns of the last 2 yearsSource: Thomson Reuters, Raiffeisen RESEARCH

Beta to MSCI EM

Beta Up-Beta Down-Beta Up-DownEM Europe 1.15 1.05 1.47 -0.42

Czech Republic 0.56 0.48 0.79 -0.31

Poland 1.01 0.87 1.30 -0.43

Russia 1.33 1.28 1.62 -0.33

Hungary 0.95 0.61 1.38 -0.76

Betas to MSCI EM; weekly returns of the last 2 yearsSource: Thomson Reuters, Raiffeisen RESEARCH

672nd quarter 2013

Cut-off for data: 21 March 2013This report was completed on 28 March 2013

Acknowledgements:Editor: Raiffeisen RESEARCH / RBI A-1030 Vienna, Am Stadtpark 9, Telephone: +43 1 717 07-0, Telefax +43 1 717 07-1848Published by: Raiffeisen RESEARCH GmbH, 1030 Vienna, Am Stadtpark 9. Published and manufacured in ViennaPrinted by: Holzer Druck, 1100 Wien, Buchengasse 79Cover photo: fotoliaDesign: Kathrin Rauchlatner, Birgit Bachhofner

Company: Disclosure:CA Immobilien: 3MOL: 1, 4Azoty Tarnow: -PKO BP: 5, 11LUKoil: -

Detailed disclosure and disclai-mer on the aforementioned com-pa nies as well as on the „cover-age universe“ of Raiff eisen Cen-tro bank pursuant to § 48 Stock Ex change Act: http://www.rcb.at.

Disclosures under § 25 Mediengesetz (as per 16 February 2013)Published by: Raiffeisen RESEARCH GmbH, Sitz: 1030 Wien, Am Stadtpark 9Management: Peter Brezinschek, Helge Rechberger, Kurt Kotzegger Raiffeisen Bank International AG. Object of business: Credit institution, Principal place of business: 1030 Wien, Am Stadtpark 9.Board of management: Herbert Stepic (Chairman), Karl Sevelda (Vice Chairman), Aris Bogdaneris, Klemens Breuer, Martin Grüll, Peter Lennkh, Johann Strobl.Supervisory board: Walter Rothensteiner (Chairman), Erwin Hameseder (Vice Chairman), Heinrich Schaller, Markus Mair, Stewart Gager, Kurt Geiger, Günther Reibersdorfer, Johannes Schuster, Friedrich Sommer, Christian Teufl.Staff council delegates: Martin Prater, Rudolf Kortenhof, Peter Anzeletti-Reikl, Susanne Unger, Helge Rechberger.Shareholder with a stake exceeding 25 per centRaiffeisen Zentralbank Österreich AG (78.5%); principal business: acquisition, management and controlling of participa-tions, in particular Raiffeisen Bank International.Management: Walter Rothensteiner, Johannes Schuster, Johann Strobl.General direction: Information and forecasts regarding the money and capital markets of Central and Eastern Europe and Austria.

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SPECIFIC RESTRICTIONS FOR THE UNITED STATES OF AMERICA AND CANADA: This research report may not be transmitted to, or distributed within, the United States of America or Canada or their respective territories or possessions, nor may it be distributed to any United States person or any person resident in Canada, unless it is provided directly through RB International Markets (USA) LLC, a U.S. registered broker-dealer (‘RBIM’), and subject to the terms set forth below.SPECIFIC INFORMATION FOR THE UNITED STATES OF AMERICA AND CANADA: This research report is intended only for institutional investors and is not subject to all of the independence and dis-closure standards that may be applicable to debt research prepared for retail investors. This report has been provided to you through RB International Markets (USA) LLC, a U.S. registered broker-dealer (‘RBIM’) but has been prepared by our non-U.S. affiliate, RAIFFEISEN RESEARCH (‘RR’). RBIM accepts sole responsibility for its content. Any order for the purchase or sale of securities covered by this report must be placed with RBIM. You may reach RBIM at 1133 Avenue of the Americas, 16th Floor, New York, NY 10036, 212-600-2588. This research has been prepared outside the United States by one or more analysts who may not have been subject to rules regarding the preparation of reports and the independence of research analysts comparable to those in effect in the United States. The analyst or analysts who prepared this research (i) are not registered or qualified as research analysts with the Financial Industry Regulatory Authority (FINRA) in the United States and (ii) may not be associated persons of RBIM and therefore may not be subject to FINRA regulations, including regulations related to the conduct or independence of research analysts.The opinions, estimates and projections contained in this report are those of RR only as of the date of this report and are subject to change without notice. The information contained in this report has been compiled by RR from sources believed to be reliable but no representation or warranty, express or implied, is made by RR or its affiliated companies or any other person as to the report’s accuracy, completeness or correctness. Those securities that are not registered in the United States may not be offered or sold, directly or indirectly, within the United States or to U.S. persons (within the meaning of Regulation S under the Securities Act of 1933 (the ‘Securities Act’) except pursuant to an exemption under the Securities Act. This report does not constitute an offer with respect to the purchase or sale of any security within the meaning of Section 5 of the Securities Act and neither this report nor anything contained herein shall form the basis of, or be relied upon in connection with, any contract or commitment whatsoever. This report provides general information only. In Canada it may only be distributed to persons who are resident in Canada to whom trades of the securities described herein may be made exempt from the prospectus requirements of applicable provincial or territorial securities laws.RESEARCH ANALYST COMPENSATION: Research analysts employed by RR are not compensated for specific investment banking transactions. The author(s) of this report receive(s) compensation that is based on (among other factors) the overall profitability of Raiffeisen Bank International AG (‘RBI’), which includes earnings from RBI’s investment banking and other businesses. RR generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or futures of any companies that the analysts cover.CERTIFICATION: Each RR analyst who is involved in the preparation of this research report certifies that: a) the views expressed in the research report accurately reflect such research analyst´s personal views about the subject securities and issuers; and b) that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.RR is not obligated to update this research report. Investors must keep themselves informed on the current course of business of the issuer, any changes in the current course of business of the issuer and other relevant factors. By using this report or by relying on it in any manner whatsoever you agree to be bound by the foregoing limitations. Additional information on the contents of this report is available on request.If any term of this Disclaimer is found to be illegal, invalid or unenforceable under any applicable law, such term shall, insofar as it is severable from the remaining terms, be deemed omitted from this Disclaimer and shall in no way affect the legality, validity or enforceability of the remaining terms.

Global Raiffeisen Research Team: Peter Brezinschek (Head)ViennaAaron AlberJörg AngeléJörg BayerEva BauerBjörn ChybaGunter DeuberWolfgang ErnstChristian HinterwallnerValentin HofstätterStephan ImreChristoph KlaperIgor KovacicDagmar KönigLydia KrannerNina KukicMartin KutnyVeronika LammerJörn LangeHannes LoackerRichard MalzerAndreas MannsparthJohannes MattnerStefan MemmerChristine Nowak

Peter OnofrejHelge RechbergerMatthias ReithLeopold SalcherAndreas SchillerRobert SchittlerAndreas SchwabeConnie SchümannManuel SchusterGintaras ShlizhyusAlexander SkleminGottfried SteindlMartin StelzenederMagdalena WasowiczJürgen Walter

Albania Joan CanajValbona GjekaRezarta ArapiPerparim SheraFjorent Rrushi

BelarusOleg LeontevVasily Pirogovsky Olga LaschevskayaMariya Keda

Bosnia & Herzegovina Ivona ZameticaSrebrenko Fatusic

BulgariaKaloyan GanevHristiana Vidinova

CroatiaAnton StarcevicZrinka Zivkovic MatijevicIvana Juric Nada Harambasic-NereauAna FraninElizabeta Sabolek Resanoviæ

Czech RepublicMichal BrozkaVaclav FranceHelena HorskaLenka Kalivodova

HungaryZoltán TörökÁdám KeszegLevente Blahó

KosovoFisnik Latifi

PolandMarta Petka-ZagajewskaDorota StrauchTomasz RegulskiPawe³ RadwañskiPiotr JelonekMichal Burek

RomaniaIonut DumitruNicolae Covrig Gabriel BobeicaAna-Maria MorarescuAlexandru CombeiIuliana MocanuAlexandru Neagu

RussiaAnastasia BaykovaDenis PoryvayAnton PletenevMaria PomelnikovaRita TsovianIrina AlizarovskayaKonstantin YuminovSergey LibinAndrey PolischukFedor KornachevNatalia Kolupaeva

SerbiaLjiljana Grubic

SlovakiaRobert PregaJuraj ValachyBoris Fojtik

SloveniaPrimoz Kovacic

UkraineDmytro SologubLudmila ZagoruykoOlga Nikolaieva

Company ResearchStefan Maxian (Head)Daniel DamaskaOleg GalburNatalia FreyJakub KrawczykBartlomiej KubickiBernd MaurerDominik NiszczMarkus RemisTeresa SchinwaldBernhard SelingerJovan SikimicArno SupperChristoph ThurnbergerIryna Trygub-Kainz

68 1st quarter 2013

Raiffeisen Bank International AG, Vienna

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Belgrade: Raiffeisenbank a.d. SerbiaZoran Petrovic Tel: +381 11 2207006

Bratislava: Tatra banka, a.s. Peter Augustin Tel: +421 2 59191440

Bucharest: Raiffeisen Capital & Investment S.A.James Stewart Tel: +40 21 302 0082

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Tirana: Raiffeisen Bank Sh.a.Christian Canacaris Tel: +355 4 253 646

Prague: Raiffeisenbank a.s.Jan Pudil Tel: +420 234 401 863

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Zagreb: Raiffeisenbank Austria d.d.Ivan Zizic Tel: +385 1 45 66 466

Raiffeisen Bank International AG

Investment Banking Units

Institutional Equity Sales, Vienna Head: Wilhelm Celeda Tel: +43 1 515 20 402Sales: Klaus della Torre Tel: +43 1 515 20 472

Merger & AquisitionsGerhard Grund Tel: +43 1 51520-302Wolfgang Putschek Tel: +43 1 710 54 00-153

Raiffeisen CENTROBANK AG

Raiffeisen Bank International AG, ViennaCorporate Customers: Joseph Eberle Tel: +43 1 71707 1487Financial Institutions: Axel Summer Tel: +43 1 71707 1476

RBI London BranchGraham Page Tel: +44 20 7933 8108Mark Bowles Tel: +44 20 7933 8001

Raiffeisen Malta Bank plc., Sliema Anthony Schembri Tel: +356 21 320 942

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RBI Beijing Branch Andreas Werner Tel: +86 10 653 233 88

RBI Singapore BranchStefan Mandl Tel: +65 6305 6100

Commercial banks

Vienna: Raiffeisen Bank International AGRudolf Lercher Tel: +43 1 71707 3537

Belgrade: Raiffeisen banka a.d.Sofija Davidovic Tel: +381 11 220 7807

Bratislava: Tatra banka, a.s.Henrieta Hudecova Tel: +421 2 5919 1849

Bucharest: Raiffeisen Bank S.A.Reinhard Zeitlberger Tel: +40 21 306 1564

Budapest: Raiffeisen Bank Zrt.László Volosinovsky Tel: +36 1 484 4639

Kiev: Raiffeisen Bank AvalOksana Volchko Tel: +38 044 230 0348

Maribor: Raiffeisen Banka d.d.Simon Jug Tel: +386 2 2293 276

Minsk: Priorbank JSCAnastasiya Volkovich Tel: +375 17 289 92 03

Moscow: ZAO Raiffeisenbank AustriaMaria Maevskaya Tel: +7 495 775 5230

Prague: Raiffeisenbank a.s.Roman Lagler Tel: +420 234 40 1728

Pristina: Raiffeisen Bank Kosovo J.S.C.Lirije Llazani-Hoxha Tel: +381 38 22 22 22 184

Sofia: Raiffeisenbank (Bulgaria) EADYavor Russinov Tel: +3592 9198 5136

Sarajevo: Raiffeisen Bank d.d. Bosna i HercegovinaVildana Sijamhodzic Tel: +387 33 287 283

Tirana: Raiffeisen Bank Sh.a. Jorida Zaimi Tel: +355 4 2381 445 2865

Warsaw: Raiffeisen Bank Polska S.A.Zuzanna Szatkowska Tel: +48 22 585 2431

Zagreb: Raiffeisenbank Austria d.d.Wolfgang Wöhry Tel: +385 1 4566 462

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